Macro Vol Commentary
Following the exuberant rally in January and February, an unexpectedly positive Chinese PMI print at the end of March helped risky assets close out one of their best quarters on record. Renewed US-China trade optimism salvaged domestic equity markets that had appeared to run out of steam toward the tail end of March, with the S&P 500 closing out Q1 2019 with the 9th best 1st quarter since 1928 (+13.1%). Global risk assets are yet again experiencing the accommodative positive feedback loop of central banks and the perceived protection of the “Fed Put.”
Accordingly in US volatility markets, the realized volatility of the S&P 500 was 13.6 vol points for the quarter, which was over 10 vol points lower than in the 4th quarter of 2018. The 1-month volatility risk premium was persistent and attractive, and felt similar to the low volatility periods in 2016 and 2017.
In Europe, despite PMI data continuing to decline amidst the backdrop of an otherwise poor macro environment, the risk of policy-driven bullish price action (as opposed to being driven by fundamentals) remains high. Europe continues to be under-owned and an extremely crowded short. We anticipate the impact of the shift in European Central Bank policy will create further upward momentum in European equities. Implied volatilities in the UK are trading at the mercy of ever changing Brexit headlines with volatility risk premiums throughout the month on UKX Index and GBPUSD trading at seemingly unjustified premiums to other regions.
Finally in Asia, a rather sanguine environment against the backdrop of soaring Hong Kong and China equities was disrupted only partially by a tick- up in both Nikkei-225 Index implied and realized volatility. Concerns in March centered around global growth and trade policy uncertainty that, like the rest of global markets, proved only temporary as risk assets rebounded through much of the final few days of first quarter trading.
Cross-Asset Volatility Monitor
There was an increase in the dispersion in our proprietary 20 asset volatility monitor. While most equity market Volatility Risk Premium (“VRP”) continues to be positive, the gap narrowed as compared to Jan/Feb, with cracks starting to show in high beta markets like RTY, EEM and KOSPI2. However, perhaps the most interesting opportunity comes in China, with HSI implied vol at historic lows, presenting a potential opportunity to add convexity at a relatively cheap cost.
Meanwhile, commodity markets continue to boast one of the most attractive short-term VRP opportunities available in the market, with both USO and UNG continuing to trade at rich implied vol levels (on the back of historical volatility events in Q4 2018) with low accompanied realized volatility creating for attractive (but highly negatively convex) short vol opportunities.
Emerging Market currencies had an exciting month led primarily by the Turkish Lira and South African Rand. While G10 currencies were substantially less volatile, with numerous currencies at historically low levels of realized vol. The shadow of recent volatility events hangs over FX markets, with a more attractive VRP resulting in positively convex trades starting to carry increasingly negative.
With the volatility of Q4 now a distant memory, investors are adding to short volatility exposures in earnest as the shift in future monetary policy is being seen as a cure all. We anticipate this environment will persist until there is a fundamental or exogenous shock. As a result, we are using the current market environment to add attractive long volatility opportunities near post crisis lows while maintaining attractive carry in our vega neutral and short volatility strategies.
Important Disclosures and Definitions:
The viewpoints expressed in this report are solely those of Infinity Q Capital Management, LLC, (“Infinity Q”) and can change without notice.
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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.