Waves of Volatility Whipsaw Markets on Powell Tilt, Omicron Risk

(Bloomberg) -- Volatility is back, thanks to mounting concerns about the new omicron Covid variant and a surprise hawkish tilt by Federal Reserve Chairman Jerome Powell.

The S&P 500 Index sank 1.9% on Tuesday after Powell told the Senate Banking Committee that the Fed should consider ending its pandemic support program sooner than expected. The move wiped out Monday's gain and pushed the Cboe Volatility Index, better known as the VIX, close to where it was in May -- when the stock market briefly tumbled as investors started growing fearful about how long inflation would stick around.

While volatility implies increased market turbulence that could lead to further selling pressure, some market participants welcome the disturbance. “The old adage that markets hate uncertainty couldn't be more true, and it's going toe-to-toe with another well-known force, investors' love of dips,” said Craig Erlam, senior market analyst at Oanda.

Here's a look at how volatility is cropping up in several key markets:

Streak Stopper

November has been the strongest month for the S&P 500 over the last decade, with an average gain of 2.7%. But investors who bet on that trend continuing in 2021 have received a rude awakening. The U.S. equity benchmark fell 0.8%, which snaps a nine-year streak of green Novembers.

Volatile Volatility

The Cboe VVIX Index, a measure of the volatility of the VIX, has jumped above 140 twice in the last week after averaging 114 over the past year. A higher VVIX signals expectations that the VIX will remain inflated over the next 30 days and could whipsaw significantly. A similar large rise in the VVIX happened in January when Powell's comments on Covid-19 and vaccines roiled markets. Back then, the gauge topped out at 158, while the VIX reached 37.2.

Nowhere to Hide

Traders looking for shelter from increased equity volatility in the bond market this month have instead been forced to confront more choppy trading. The ICE BofA MOVE Index, which measures one-month expected swings in U.S. bonds, touched its highest since March 2020 this week amid an unusually turbulent month for Treasuries. The 10-year yield has whipsawed, falling as low as 1.41% on Tuesday after climbing as high as 1.69% before the Thanksgiving holiday.

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