Via Dana Lyons’ Tumblr,

esterday saw the VIX solidly higher despite the fact that stocks rallied hard; what do similar precedents tell us?

Markets have been on a parade of peculiarity since the presidential election a month ago. Today’s rally on Wall Street was no exception. Yesterday, we noted the 3-month low in the S&P 500 Volatility Index (VIX), and the historically bullish connotations for the rest of December. Today, the VIX pulled an about-face, despite the strength in stocks. Specifically, the VIX uncharacteristically jumped 3.5% even though the S&P 500 (SPX) was up more than 1%. We thought that was odd so we looked at the historical data. It turns out that it was.

Since the VIX’s inception in 1986, today marks just 30th time in which the VIX rose at least 3.5% on a day that the S&P 500 gained at least 1%. 22 of those days occurred with the SPX within 2% of a 52-week high, as was the case today.

So, who’s right – stocks or volatility? Well, from a glance at the chart, there are a handful of glaring occurrences at cycle highs (e.g., August 1987, July 1990, March 2000). However, let’s look at the aggregate performance of the S&P 500 and the VIX following these 22 prior occurrence.

Prior precedents would suggest that the VIX is in the right here. The SPX saw median losses from 1 week to 3 months following previous occurrences, though median returns were never worse than -1.2%. The consistency of losses was the biggest offender, with almost ¾ of the events showing losses after a month and 1/3 after 2 months. Whatever effect this scenario had on forward performance, it seems to be a short to intermediate-term one. By the 6-month mark, median returns turned positive and began a path toward “normal” returns.

As for the VIX, the opposite occurred (predictably, as the VIX tends to move counter to stocks, today’s events notwithstanding). The VIX showed median gains from 2 days out to 3 months. Its peak median gain came at the 2-month mark at +10%. VIX gains were pretty consistent as well, with about 2/3 of the dates showing a rising VIX over all durations, 2 days to 3 months. Again, by 6 months, the VIX seemed to settle down, posting a 1% median drop.

There are a lot of positive factors going for the stock market right now, not the least of which is price action. Therefore, we don’t want to make too much of this odd data point with its limited sample size. However, to the extent that this face-off between rising stocks and a rising VIX has any influence on future performance, historical precedents suggest it may be the stock market that blinks – at least in the shorter-term.

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That Reuters trial balloon was right.

In an unexpected, to the conesnsus, announcement, Mario Draghi turned hawkish after all, and while the ECB kept all rates unchanged, it announced that it would effectively taper its bond purchases from €80 billion to €60 billion starting in April 2017 until the end of the year: “From April 2017, the net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.”

However, the ECB hedged, and also added that “if the outlook becomes less favourable or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation, the Governing Council intends to increase the programme in terms of size and/or duration.”

So tapering, but conditional on the market not falling apart; should risk return, the ECB will return to the familiar program of €80 billion per month, or more.

Additionally the ECB suggested that it will address bond scarcity and expand the scope of eligible bonds, saying that “to ensure the continued smooth implementation of the Eurosystem’s asset purchases, the Governing Council decided to change some of the parameters of the APP, which will be communicated at today’s press conference and in a separate press release.”

Full press release:

Monetary Policy Decisions

 

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.

 

Regarding non-standard monetary policy measures, the Governing Council decided to continue its purchases under the asset purchase programme (APP) at the current monthly pace of €80 billion until the end of March 2017. From April 2017, the net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. If, in the meantime, the outlook becomes less favourable or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation, the Governing Council intends to increase the programme in terms of size and/or duration. The net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the APP.

 

To ensure the continued smooth implementation of the Eurosystem’s asset purchases, the Governing Council decided to change some of the parameters of the APP, which will be communicated at today’s press conference and in a separate press release.

 

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.

• Draghi Expected to Lay Out Plans for More ECB Stimulus (WSJ)
• Bonds Fall as Investors Turn Wary on ECB Stimulus; Euro Gains (BBG)
• European Stock Traders Look to Draghi to Break Santa Curse  (BBG)
• Trump to nominate Pruitt to lead U.S. environmental agency (Reuters)
• Trump’s choice of China envoy a positive sign for ties, Xinhua says (Reuters)
• Syrian Rebels Pin Hopes on Trump (WSJ)
• Trump Pick of EPA Foe to Lead Agency May Spark Senate Fight  (BBG)
• Russia Sells Stake in Oil Giant Rosneft to Glencore, Qatar (WSJ)
• The Return of Glencore’s Dealmaking King (Bloomberg)
• Italian bank Intesa to help fund Rosneft deal for Glencore and Qatar (Reuters)
• Sovereign-Wealth Funds Buy Stake in U.K. Gas Business (WSJ)
• Monte Paschi Seeks ECB Reprieve as It Tries to Escape Bailout (BBG)
• Vietnam dredging on South China Sea reef (Reuters)
• Deutsche Bank May Have Rigged Index in Paschi Deal, Audit Shows (BBG)
• Eyeing upswing, more U.S. oilfield service firms restructure (Reuters)
• Michael Jordan Scores China Legal Victory for His Chinese Name  (BBG)
• How Trump’s Web of Businesses Obscures Potential Conflicts (WSJ)
• Facebook’s Investors Criticize Marc Andreessen for Conflict of Interest (BBG)
• Merkel Sticks to Middle Ground in Risky Pitch for German Votes  (BBG)
• China’s Banks Are Hiding More Than $2 Trillion in Loans (WSJ)
• Facebook’s Investors Criticize Marc Andreessen for Conflict of Interest  (BBG)

Overnight Media Digest

WSJ

– U.S. stocks posted their biggest rally since the election, sending major indexes to fresh records as investors increasingly conclude President-elect Donald Trump will be good for business and the economy. http://on.wsj.com/2h8mFLj

– The CEOs of AT&T Inc and Time Warner Inc on Wednesday defended their proposed $85 billion merger to lawmakers, trying to navigate a tricky political landscape in which President-elect Donald Trump has expressed hostility to the deal. http://on.wsj.com/2hjV7yR

– President-elect Donald Trump on Wednesday chose Oklahoma Attorney General Scott Pruitt to lead the Environmental Protection Agency, according to a transition official, turning to a climate-change skeptic and sharp critic of the agency to take its helm. http://on.wsj.com/2gbVAae

– Rampant use of an accounting sleight of hand means Chinese banks don’t have to set aside capital to cover potential losses, sowing fears of a crisis. http://on.wsj.com/2hkJhV0

– President-elect Donald Trump turned to a third retired military officer to help him run the country when he takes office in January, a move that represents an unusual level of military influence in the executive branch. http://on.wsj.com/2hlLn7r

– Passage of legislation aimed at speeding up Food and Drug Administration approvals, combined with an incoming president who has pledged to “cut red tape” at the agency, is expected to usher in a new, more industry-friendly era of drug and device regulation. http://on.wsj.com/2h7fbbb

– Syrian rebels on Wednesday proposed a civilian evacuation and negotiations over the future of Aleppo, a stark admission the opposition is all but defeated in a divided city seen as a bellwether in the country’s nearly six-year war. http://on.wsj.com/2gb850P

NYT

– The Russian government announced Wednesday that it will sell nearly 20 percent of its state oil company, Rosneft , to Swiss commodity trading firm Glencore and the sovereign wealth fund of Qatar. http://nyti.ms/2h8jqDt

– City Council in Portland in Oregon voted on Wednesday to impose a surtax on companies whose chief executives earn more than 100 times the median pay of their rank-and-file workers. The surcharge, which Portland officials said is the first in the nation linked to chief executives’ pay, would be added to the city’s business tax for those companies that exceed the pay threshold. http://nyti.ms/2h8kS90

– The European Central Bank is expected to say on Thursday that it will buy large quantities of government bonds and other assets for longer than initially planned, an attempt to protect the eurozone economy from an increasingly unpredictable political landscape. http://nyti.ms/2h8brWU

– China’s highest court ruled largely in favor of former basketball star Michael Jordan on Thursday in a closely watched trademark case. The decision held that Jordan owns the legal rights to the Chinese characters of the equivalent of his name, overturning a lower-court ruling. The lawsuit pitted Jordan against Qiaodan Sports Company, which he accused of using the Mandarin transliteration of his name on its goods. http://nyti.ms/2h8kN5j

– President-elect Donald Trump is considering formally turning over the operational responsibility for his real estate company to his two adult sons, but he intends to keep a stake in the business and resist calls to divest, according to several people briefed on the discussions. http://nyti.ms/2h8fgLI

Canada

THE GLOBE AND MAIL

** The civil servant in charge of the government’s spy-watchdog agency says Canada may have to reconsider how it shares intelligence with the United States if president-elect Donald Trump makes good on his promise to torture terrorists to gather intelligence. https://tgam.ca/2h6uqyd

** Chicago-based PrivateBancorp Inc. is postponing the shareholder vote for its $4.9-billion sale to Canadian Imperial Bank of Commerce, raising questions about whether CIBC will have to sweeten its bid next year. https://tgam.ca/2h6tkCy

** Canada is set to overhaul the way financial transactions are processed as changing technology and globalization reshapes the way individuals and businesses move money and access their funds. https://tgam.ca/2h6weYc

NATIONAL POST

** Ontario officials said the province’s own land-use restrictions around its largest city have constrained the supply of detached homes. http://bit.ly/2h6wO88

** A major international union has taken the first step towards unionizing pilots at WestJet Airlines Ltd, taking over the work begun internally last year. http://bit.ly/2h6nJw6

Update: it appears that early elections are indeed coming to Italy, which could be another major calendar event for Italy, and one which would have far more significant consequences for the political make up of the country should M5S win as many expect. From Reuters:

ITALY INTERIOR MINISTER, SPEAKING AFTER CONVERSATION WITH RENZI, SEES NEW ELECTIONS LIKELY IN FEBRUARY – CORRIERE DELLA SERA 

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The Euro has been hit this morning, losing some 50 pips following reports in both La Repubblica and Corriere, that Matteo Renzi may stay in power for several weeks before potential early elections in January-February of 2017. According to La Repubblica, Renzi may ask that early elections are held in near future in return for staying in power until then. As previously reported, the next Italian general election must be held no later than 23rd May 2018.

The move has pressured other Italian assets, with BTP futures retreating from highs and the Italian bank index paring gains as investors focus on potential for Italian elections to be held early next year.

However, there has been some confusion about the date of the snap elections, because President Mattarella reportedly doesn’t see elections in February technically feasible because changes are needed to the country’s election law known as Italicum.

There is another consideration: should snap elections be hald soon, they would likely lead to a victory for Italy’s anti-establishment Five Star Movement, which as noted on Sunday has already called for immediate elections after the outgoing prime minister Matteo Renzi’s defeat in a constitutional referendum, saying it was prepared to put forward a new government that could immediately assume power.

While it appears unlikely that Beppe Grillo, a former comedian and co-founder of the populist party, will get his general election wish, the bold demand showed his Movimento Cinque Stelle (M5S) now has its sights on an even greater electoral victory: one that would eventually land it in the prime minster’s residence in Palazzo Chigi.

As the Guardian reported, many analysts pointed out that M5S still faces considerable obstacles, including probable reforms of electoral law that will make it difficult for the party to get a majority. “But even if such manoeuvres keep it at bay temporarily, one thing is clear: the party is now the second most powerful force in Italy behind Renzi’s diminished Democratic party.”

Vincenzo Scarpetta, a senior policy analyst at the thinktank Open Europe, said M5S would have a fair chance of winning the next general election under current electoral rules, but those rules are likely to change in coming months under the current Democratic-controlled parliament, which may be the impetus behind delaying elections as much as possible, and why today’s report of early snap elections has led to Euro weakness.

The decision to call immediate elections ultimately falls with Italy’s president, Sergio Mattarella.