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‘Fear gauge’ futures signals U.S. stock selling crescendo

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Economy 3 hours ago (Sep 21, 2022 05: 27PM ET)

'Fear gauge' futures signals U.S. stock selling crescendo Reuters. FILE PHOTO: Traders focus on the trading floor at the brand new York STOCK MARKET (NYSE) in Manhattan, NEW YORK, U.S., September 13, 2022. REUTERS/Andrew Kelly

By Saqib Iqbal Ahmed

NY (Reuters) – Futures linked with Wall Street’s fear gauge on Wednesday sent a sign which has historically marked intense selling pressure in markets, but has sometimes preceded currency markets rebounds.

The October futures rose 0.28 points above the November futures on Wednesday, the widest margin since mid-June, after Wall Street’s main indexes sold off carrying out a 75 basis point interest hike by the Federal Reserve.

VIX futures, which plot volatility expectations for many months ahead, normally remain upward sloping, with near-term futures relatively less pricey than the ones that target coming months.

An inverted curve, when near-dated contracts tend to be more expensive than later dated ones, suggests investors are growing more concerned about near-term events, raising the price of hedging.

This type of signal has occurred prominently five times since 2020, with two instances accompanied by market rebounds, like the latest one in mid-June.

“It’s usually an indicator all of the risk has been pulled in to the here and the now,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group.

“That is why often we shall consider it as a capitulation indicator,” Murphy said.

Both nearest VIX futures last inverted in June, amid a episode of intense selling that drove the S&P 500 () to its bear market low. The index rebounded 17% immediately after, though the majority of that rally has been reversed on fears the Fed could be more hawkish than previously anticipated.

While an inversion this time around may indicate intensifying selling pressure, it generally does not necessarily signal an instantaneous end to the market’s recent slide, Murphy said. For example, both front month VIX futures remained inverted for per month – from mid-February through mid-March – prior to the currency markets sell-off in the initial quarter took a breather.

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