Macro Vol Commentary
Similar to January, throughout February cross-asset volatility continued to grind lower, making it feel as if 2018 was a distant memory. Inparticular, FX volatility reached 12-year lows driven by a reinvigorated dovish Fed, trade optimism and strong US data. Infact, most risk measures across all 5 major asset classes reached the 1st quartile over the past 10 years, reflecting a complete suppression of both implied and realized measures of volatility since the beginning of the year with chances of a 2019 rate
hike becoming more remote.
Throughout US markets, the vol crush continued in earnest despite the conviction that markets are undeniably later cycle than in 2017. In fact, February has seen many investors dust off the 2017 playbook of ‘buy-the-dip’ and sell front-end vol to almost immediate success. That being said, a more cautious approach may be warranted as there is growing concern about the sustainability of this dramatic volatility suppression. Should current market euphoria run out of steam, it seems volatility markets are offering potentially attractive measures to protect downside within the portfolio.
In Europe, realized volatility continues to be lower than in the US and Asia. Despite the continued headline risks including political uncertainty and Brexit concerns, Eurozone equities have either trended lower or trended higher without the violent moves observed in other regions. On the surface, this appears to be disconnected from the growing economic and political risks in the region, but the lack of investor exposure to indices such as the SX5E creates the backdrop for this period of stubbornly low implied and realized volatilities to persist.
The story thus far in Asia has revolved around China and the supposed trade deal between US & China on the horizon. Despite several delays, Asian equities reflected relative calm in February on the impending trade deal and amidst weakening economic data out of China. Current market positioning suggests many prefer reaching for upside in Asia keeping implied volatility metrics relatively firm (compared to US and Europe) despite similar complete underperformance of realized vol over the month.
Cross-Asset Volatility Monitor
The end of February results in an admittedly less exciting 20 asset volatility monitor with markedly less dispersion, most volatility risk premiums slightly positive and almost all implied volatility metrics not historically stretched. Particularly in global equity markets (which make up the first 11 assets in the below chart), the difference between 1-month implied and realized volatility are positive for every single market. This echoes street-wide sentiment on the complete underperformance of realized volatility and the coordinated decline in global measures of risk signals a reversion to a similar market environment as 2017 for the second consecutive month in 2019.
That being said, specifically within equity markets the fragility of many different macro indicators (including growing credit concerns in the IG & HY markets) leads one to question if the low levels of volatility that persisted throughout February is just a welcoming opportunity for lower premium & spread structures that allow for a re-loading on hedging positions that paid off fruitfully in both February and Q4 2018.
With respect to other asset classes, VRP tells a similar story to equities, with a reliably positive spread between implied and realized volatility. However, in stark contrast to equities, most other asset classes have higher current relative levels of implied volatility, perhaps suggesting that things may not be as sublime as equity volatility metrics suggest.
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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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