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Global Macro: Budget Deal Sparks Volatility

NEW YORK (TheStreet) -- A tentative budget deal proposed by Congress on Wednesday led a market selloff on fears that the Federal Reserve will begin to reduce its bond-buying program sooner than what had been expected.

U.S. congressional leaders agreed on a framework for a budget deal that may alleviate some partisan rancor in the future. Both parties made concessions in an effort to construct a budget that would be sufficient and would reduce the country's debt load. The cooperation from both parties may have also set a precedent for swift and relatively painless debt-ceiling negotiations in early 2014.

Markets reacted to the news negatively because an improved fiscal outlook may take some weight off the Fed's shoulders. The Fed could now give guidance on possibly raising rates, while reducing the size of its bond purchases. Equity indexes sold sharply throughout the day and the VIX spiked higher.

Wednesday's news doesn't guarantee tapering in December; however, it does shorten the expected timeline of when tapering begins. With the budget deal and a stronger labor market, traders have begun to price in less monetary intervention by bidding interest rates higher.

The House of Representatives is set to vote on the budget as early as today. The passage of the plan, along with the December Fed meeting, could fuel a volatile selloff. The chart below of the VXX highlights potential market moves.

The VIX has sold off for most of the year as monetary stimulus has made global equity indexes attractive. As we approach the upcoming Fed meeting with whispers of tapering in the air, volatility could begin to trade back at its October/ September highs.

This kind of move assumes a $30 price appreciation in the index below, and considering that the S&P 500 is trading at record highs, that seems possible.

VXX Chart VXX data by YCharts

At the time of publication, the author had no position the index mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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Chart of I:DJI
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