As expectations grow that the FOMC will raise rates this week, the focus is on how developments in the US market and increased VIX selling will affect Japanese and US equity markets.
Market expectations are growing that the US Federal Reserve (FRB) will raise rates at the FOMC meeting it will hold on the 15th and 16th this week, and the move is seen as potentially having a major spillover effect on Japanese and US equity markets. The adjustment to the policy-rate path is considered among the largest on record since the start of the year, and views are spreading that stock market reactions will vary depending on whether the rate hike is implemented and on the outlook for further hikes.
Following the release of August US consumer price index (CPI) data, information supporting forecasts of monetary policy has emerged through movements in short-term interest rate futures. Data based on the CPI results is serving as an input into the FRB's decisions on rate cuts and hikes, and market participants are reassessing their outlook for interest rates.
In such an environment, volatility in Japanese and US equity markets can increase, and periods of heavier selling of the VIX, known as the fear gauge, can also occur. Market participants increasingly believe that the implementation of a rate hike and changes in the outlook will affect the level of the VIX and trends in outstanding options positions.