Daily Commentary BY THE CURVE TEAM –

VIX Pauses It’s Updraft

16th October 2018

US tax cuts and increased spending contributed to a deterioration in the US deficit by USD 113 billion in the last 12 months according to data released overnight. US rates were steady as the violent shift last week probably anticipated this announcement. The US has certainly opened the fiscal spending valve with a minimal increase in tax revenues representing any growth dividend thus far.

US rates have risen to a level higher than the inflation rate and may well proceed to factor in a growth premium to more closely represent positive real rate and term premium returns. The next sizeable issuance of 3/10/30 yr Treasuries is on the 6th, 7th and 8th of November.

Rising rates have created a surge in volatility. The VIX volatility index spiked to 25 from a docile 12, but has softened to 21 over the last two trading sessions. This is a much softer level than the spike to 37 we saw back in February 2018.

Merrill Lynch forecast yesterday a weaker USD with the AUD rising to 84 cents during 2019. The USD has been a safe haven for the last 9 months and clearly needs to weaken to drive further economic growth as the trade war impacts play out.

The RBA minutes for the October meeting will be released today at 11.30am.

Peter Sheahan

Director - Institutional Markets