Volatility seen lingering no matter what the Fed does

Wed Sep 16, 2015 1:04am EDT
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By Saqib Iqbal Ahmed

NEW YORK (Reuters) - While investors, traders and forecasters may be on the fence as to whether the Fed pulls the trigger this week on the first U.S. interest rate hike in nearly a decade, Wall Street's "smart money" is decisive on one thing: market volatility will linger.

Heading into Thursday's potentially momentous decision on interest rates from the Federal Open Market Committee, the Federal Reserve's monetary policy-setting panel, speculative positions in CBOE VIX index futures are the most net long on record.

To this crowd of hedge funds and other big speculators, it really doesn't matter what the Fed does. Raising rates for the first time since 2006 would almost certainly send waves through equity markets, and not moving will keep the guessing game - and accompanying market gyrations - alive for weeks to come.

"There is a general consensus in the market that the Fed meeting will continue the volatility, and if they don’t do anything it may sustain the volatility at least for six more weeks till their next meeting," said J.J. Kinahan, chief strategist at TD Ameritrade in Chicago.

The most recent weekly Commitments of Traders data from the Commodity Futures Trading Commission shows speculative net long positions in VIX futures stood at 37,925 contracts as of Sept. 13. Not only is that a record high, it is more than two standard deviations from the norm.

Since VIX futures, a forward-looking gauge of market risk, were introduced in 2004, speculative positions have been skewed toward lower volatility far more often than not. Long VIX futures positions benefit from increased volatility and can be used to protect equity portfolios.

Moreover, positioning in VIX futures has flipped like never before over the last month as the Fed guessing game has been compounded by worries over the health of China's economy and its wobbly stock market.

In contrast to the latest positioning, speculators in early August were net short by 64,445 contracts - a reversal of more than 100,000 in five weeks - highlighting the strong conviction of hedge funds and other large speculators that market gyrations are far from over.   Continued...

The Federal Reserve building in Washington September 1,  2015.    REUTERS/Kevin Lamarque