Commentary on financial market developments – February 2018
Highlights:
- CNB raises interest rates
- Correction hits stock markets
Commentary:
After a great start to the new year, when stock indices rose strongly, a correction swept through the market in February, erasing January’s gains. Oil and, surprisingly, gold, which has otherwise been in an uptrend since 2016, also fell.
Right at the beginning of February, the CNB raised the key interest rate by a quarter of a percentage point to 0.75%. The CNB is trying to put the brakes on the price level as the combination of low interest rates and high economic performance leads to rising inflation. In its new forecast, the CNB even improved its estimate of the Czech economy’s growth this year to 3.6% from the original 3.4% estimated in November. For next year, the CNB has improved its estimate to 3.2% from the previous 3.1%. The rise in the base interest rate will lead to a long-term appreciation of the CZK and a rise in credit prices, thus also putting the brakes on the gradual overheating of the domestic economy.
It is difficult to pinpoint the causes of the stock market correction at this time. There has been no major bad news, but rather a calming of tensions on the Korean peninsula. The cause of the decline is therefore probably the absence of further positive news, coupled with concerns about whether stocks are overpriced. In addition, in the United States, the Fed is threatening to have to raise interest rates more quickly and more frequently, as US inflation is at risk of accelerating due to the strong fiscal expansion pushed through by Donald Trump.
Investor School – January Effect:
The VIX volatility index, also called the fear index, is technically speaking a measure of implied volatility for put and call options on the S&P 500 index traded on the Chicago Board Options Exchange. Simply put, the index shows the expected 30-day volatility in the markets that are represented by the broad U.S. S&P 500 index. The more fearful investors are, the more they hedge their positions with options and the VIX index shows higher values. Conversely, the calmer they expect the future to be, the lower the index shows.
The chart shows that investors became significantly more nervous during February, which was reflected in the fear index, which surpassed its three-year high. After years of strong growth, investors are more cautious and fear a possible larger price correction.