Macro Vol Commentary
The end of April continued the first quarter trend of low volatility and relatively calm markets across the five major asset classes. This sanguine market environment fueled by easing central bank measures and persistent policy support gave rise to a melt-up in global equity markets (including new S&P 500 all-time highs) and a historical depression of volatility. The continued volatility crush drove implied volatilities near multi-year lows in not just equities but virtually all major asset classes with the exception of oil.
As we closed out April, it was clear that market consensus and positioning remained bullish and most were unprepared for the volatility created by the escalation in the trade war.
Following positive economic data, most European markets also posted gains throughout April, with the Eurostoxx in particular outperforming due to idiosyncratic factors as correlation between the stocks in the SX5E Index were abnormally low. The index is now flat over the last 5 years and has trailed the S&P 500 by nearly 70% over that period.
Developed market FX volatility reached post crisis lows during the month with GBP volatility declining the most driven by the prolonged timing of a Brexit resolution. Emerging market FX followed suit with multiple markets reaching multi-year lows including CNH and TWD volatility reaching the lowest levels since 2015.
Until the end of April, it appeared as if institutional investors were increasingly forced into participation in Asian equity markets despite concerns that China may temper some of its economic stimulus. The moderate declines experienced in China and Hong Kong were a prescient precursor of what was to come in May over renewed trade tensions.
Overall, April was a strong continuation of the exuberant rally from Q1 on the back of the accommodative positive feedback loop from central banks. Consequently, most investors were caught off guard by the heightened trade tensions around the corner.
Cross-Asset Volatility Monitor
Cross-asset risk sentiment reduced throughout the month as the volatility risk premium (VRP) was meaningfully positive for almost all assets in our 20-asset volatility monitor. The only consequential risk flare-ups during the month were in energy-related markets due to uncertainty around the next OPEC meeting. The combination of both low implied volatilities as well as meaningfully positive VRP’s, created an attractive environment for short volatility opportunities almost anywhere you looked.
While our anticipation continues to be that this low volatility market environment will persist until there is a fundamental or exogenous shock, the question weighing heavily on volatility markets is if positioning and ‘less bad’ global economic conditions alone can continue to drive realized volatility lower. In past years, that had similar global volatility characteristics, global markets had the combination of strong global growth and extremely accommodative central bank policy. Global growth has started to moderate, while dovish central bank policy appears to be fully priced into global asset classes. As a result, we are continuing to use the current market dichotomy to add attractive vega neutral positions at extremely favorable levels that allow us to carry positively if the current market environment persists, but would also provide protection if there were to be a significant flare up in risk coming from a potential exogenous shock that is not currently being reflected in global volatility levels.
Important Disclosures and Definitions:
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The indices and securities included in the Cross Asset 1-Month Probably Monitor are the 20 underlyings commonly assessed in reviewing the broad global volatility markets.
SPX Index: The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
SX5E Index: The EURO STOXX 50 is a stock index of Eurozone stocks designed by STOXX, an index provider owned by Deutsche Börse Group. According to STOXX, its goal is “to provide a blue-chip representation of Supersector leaders in the Eurozone.”
NDX Index: The Nasdaq-100 Index includes 100 of the largest domestic and international non-financial companies listed on The Nasdaq Stock Market based on market capitalization. The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology.
UKX Index: The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange.
DAX Index: The Deutscher Aktienindex (German stock index) is a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange
SMI Index: The Swiss Market Index is Switzerland’s blue-chip stock market index. It is made up of 20 of the largest and most liquid Swiss Performance Index (SPI) large- and mid-cap stocks.
AS51 Index: The S&P/ASX 200 measures the performance of the 200 largest index-eligible stocks listed on the ASX by float-adjusted market capitalization. It is considered the benchmark for Australian equity performance.
NKY Index: The Nikkei-225 Stock Average is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange.
HSI Index: The Hang Seng Index is a freefloat-adjusted market capitalization-weighted stock market index of the largest companies that trade on the Hong Kong Exchange, and is consider the main indicator of the overall market performance in Hong Kong.
Kospi2 Index: The KOSPI 200 Index is a capitalization-weighted index of 200 Korean stocks which make up 93% of the total market value of the Korea Stock Exchange.
FAANG: An acronym for the US equity market’s five most popular and best-performing tech stocks, namely Facebook, Apple, Amazon, Netflix and Alphabet’s Google.
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Past performance is no indication of future results.