Key Takeaways
- Israel-Iran conflict spikes volatility, equity futures and oil prices jump
- VIX rises above 20, signaling renewed market uncertainty ahead
- Stablecoins gain attention as firms seek payment fee alternatives
Overnight, Israel launched an attack on Iran targeting Iran’s nuclear program, top military leadership and nuclear scientists. The attack came after a relatively muted day for stocks where none of the major indices moved by more than 0.4%. However, following news of the attacks, equities tumbled in the overnight session.
At one point on Thursday night, the S&P 500 futures fell over one hundred points, but then regained about half of those losses. As is the case when equities fall, we also saw a jump in volatility with the VIX moving above 20. One thing to keep in mind is that once volatility gets going, the velocity with which it can accelerate is significant. At the end of March, VIX was hovering around 18, just nine days later, we saw it hit a high of over 60.
I have discussed multiple times the importance of getting VIX back down to its historical mean of 16, something we had pretty much accomplished earlier this week. I mentioned in a previous column, a VIX of 16 means markets have an expected move of 1%, and that is what we were seeing for much of this week. Now, with VIX back at 20 and potential for more violence, I would not be surprised if we do see a widening of trading ranges throughout the day.
Also being impacted by last night’s attack is oil. Crude oil prices had jumped more than 10% overnight. In premarket, prices have pulled back slightly, but the move we’re seeing is the biggest in five years and this is another asset that could quickly become volatile. It’s also worth noting, we still have a trade war taking place with many economists expecting higher prices on consumer goods. Based on this week’s Consumer Price Index (CPI), the impact has been relatively muted thus far. However, if crude oil prices sustain these gains or move even higher, I would expect that alone to move the needle on inflation higher. Therefore, I think it’s prudent to also keep an eye on bonds and interest rates.
Bonds are often seen as a safe haven investment during times of uncertainty, such as now. The price of bonds and interest rates are inversely correlated. As price moves higher, rates move lower. We have seen a nice rally in bonds this week with yields on the benchmark 10-year note dropping to 4.36% after moving above 4.5% just last month. The rate on the 30-year bond is 4.84%. Interestingly, bonds are nearly unchanged in premarket. One possible explanation for why bonds haven’t rallied more is because of inflation concerns. If I’m correct about that, bond prices may not have much room to move higher.
As I mentioned, despite pairing their losses, equities are lower in premarket trading. However, one group that is looking to open higher is defense stocks. Shares of Lockheed Martin and Northrop Grumman are indicated higher by 3%. However, Boeing and GE Aerospace continue to struggle following the devastating Air India flight that crashed yesterday.
One other interesting story today has to do with stablecoins. These virtual coins are used to maintain stability in crypto currencies and are usually tied to something like the U.S. dollar. The Wall Street Journal is reporting that a number of multinational companies are investigating issuing their own stablecoins as a way of circumventing traditional payment methods such as credit card payments and the fees incurred with those methods. While no company has immediate plans to launch anything, this is a story worth watching.
For today, there is a lot to watch. If I had to boil it down to just one asset though, I would watch the VIX. If we see VIX pull back below 20, it could be a positive indicator that the situation between Israel and Iran is expected to simmer down quickly. However, if volatility gains any upside momentum, then I would expect more choppiness in equities. As always, I would stick with your investing plans and long-term objectives.
tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.
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