Traders, who thrive on volatility, hope Thursday's slew of events can wake the snoozing market and some believe a shock may eventually lead to a major drop in stocks later this year.
"It's so easy to fall asleep here but we have to be in front of it somehow," said Bruce Bittles, chief investment strategist at Baird. "I'm going to be here all day tomorrow watching this stuff."
While the has churned near record highs in the last few weeks, the CBOE Volatility Index (.VIX) briefly fell below 10 to its lowest in more than a decade. To many, the complacency in the market is a warning sign. Events like Thursday's could be the trigger.
"I treat every one of these as one that generates a real jolt to volatility," said Jim Strugger, managing director, derivatives strategist, at MKM Partners. "We'll be here. We'll be manning our keyboards."
Here are the three big events traders are watching:
- The European Central Bank is scheduled to announce its decision on monetary policy at 7:45 a.m., ET, followed by ECB President Mario Draghi's press conference at 8:30 a.m. Traders are watching for any changes in the inflation forecast or indications on when the central bank will begin cutting back on its asset purchase program.
- Former FBI Director James Comey is scheduled to begin his testimony before the Senate Intelligence Committee at 10 a.m., ET. Traders are listening for whether Comey says President Donald Trump allegedly obstructed justice in the investigation of former national security advisor Michael Flynn. Such action could lead to impeachment. Comey said in written testimony released Wednesday afternoon that Trump told him regarding the Flynn investigation, "I hope you can let this go."
- The UK is set to vote in a snap election Prime Minister Theresa May called in April in an effort to increase Conservative control in Parliament as the country negotiates its exit from the EU. Stakes have risen in the last few weeks as the Labour Party gained momentum, and terrorists attacked the UK last weekend for the third time this year.
Any surprises in the European and U.S. events could reignite volatility in currencies, bonds and stocks after months of relative calm.
"Near-term price volatility may be heightened by Congressional testimony from former FBI Director Comey and may even place the S&P 500 at risk of slipping into a decline of 5 percent or more, due to the time since the last decline of this magnitude combined with elevated valuations," Sam Stovall, chief investment strategist at CFRA, said in a Wednesday note.
Last June, the S&P 500 fell more than 5 percent in the two days following the unexpected UK vote to leave the EU.
But stocks quickly recovered from the pullback and have shaken off other surprises, such as Trump's election win, to hit record highs. The S&P 500 is now up 15 percent over the last 12 months.
"I'd be more excited about playing the move, buying the dip, if we weren't so close to all-time highs," said Michael Block, chief strategist at Rhino Trading Partners.
He pointed out that declines in oil prices could weigh on stocks Thursday. U.S. crude oil futures fell 5.1 percent Wednesday, sending energy nearly 2 percent lower as the worst S&P 500 performer in afternoon trade.
That said, a quick read of headlines or misinformation can lead to false interpretation by markets. On the afternoon of May 18, the U.S. dollar index spiked as currency traders misinterpreted a video of Comey from earlier that month as clearing Trump.
Other market-moving events in coming days include an expected vote on the Financial Choice Act, which would roll back some restrictions on financial institutions, and the Federal Open Market Committee meeting scheduled for next week.
"We have been warning that although market volatility could remain low this summer, it will increase right after, as this fall is packed with events," Bank of America Merrill Lynch Emerging Asia Fixed Income/FX Strategist Claudio Piron and Global Head of G10 FX Strategy Athanasios Vamvakidis said in a Friday note. Those events include Federal Reserve and ECB policy tightening, German elections and Brexit negotiations.
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