Infinity Q Volatility Update – November 2018

macro vol commentary november 2018


Macro Vol Commentary

November was a volatile month for Domestic Equity Markets, with the S&P 500 whipsawing like a roller coaster prior to and then immediately following the US midterm elections. The beginning of November saw a 6.3% rebound from October lows, followed by a -6.4% move lower and finally a 6.0% leg higher with market flows switching from bullish to bearish and back to bullish again. The risk-off trading activity was led mostly by FAANG names, driving the Nasdaq 15% lower at the lows and realized volatility through the roof. This sentiment seemed to permeate across asset classes with signs of stress beginning to show through via widening of credit spreads and spike in commodity volatility driven by energy. In fact, CDX IG & HY 5Y spreads have widened significantly with an increase in SPX beta to credit spreads suggesting investors finally awakening to the implications of deteriorating credit markets. Through November 28th the narrative that bonds have peaked combined with equities nearing the end of the cycle had most investors positioning for a shift to a higher risk & higher volatility regime. All of that seemed to be true until Fed Chairman Powell reminded everyone of the power of the “Central Bank Put” sending equity markets sky-rocketing and volatility crashing down to end November positive on the month.

European volatility continued to underperform other regions with SX5E volatility virtually non-existent. We believe part of the reason may be a pick-up in EUR fluctuations due to Italy disagreements along with Brexit-related concerns weighing heavily on GBP meaning that FX moves may have soaked up most of the volatility in the Eurozone over the month.

Many investors believe a shift to a higher risk regime for Asian markets is on the horizon, hence the importance of owning efficient tail hedges. However, with a potential end to the Trade War with China in sight following President Trump and President Xi’s recent meeting at the G20 summit in Argentina, on the surface it appears as if volatility will remain suppressed and markets buoyed for at least the 90-day window postponing further escalation.


Cross-Asset Volatility Monitor

This month’s 20 asset Volatility Monitor highlights what a challenging month it has been to identify persistent dislocations in implied volatility across all 5 of the major asset classes (equities, FX, commodities, rates & credit). Over just 1 month, individual pockets of volatility flare-ups occurred in credit, equity and most notably commodities.

Last month, we warned investors to prepare for a new equilibrium environment where buying every 5% dip may not be as past, with that warning paid off in November with S&P drawing down 10% (from peak in October to trough in November)and volatility picking up through the month until the Fed announcement. Most equity index volatility including SPX, NKY, EEM, NDX, Kospi2 screen as fairly valued, meaning their recent realized volatility remains elevated in comparison with where they are currently priced in the implied market. We continue to tread carefully with global equity volatility into year end.

Meanwhile within commodities, the massive fluctuations in Oil and Nat Gas were the most violent we have seen in a few years. Nat Gas is currently realizing over 100 vol points and Oil close to 50 vol points on a 1-month basis. This difficult volatility environment highlights the importance of robust risk modeling and allocation management.

Some of the fixed income underliers including LQD, HYG & TLT continue to screen expensive despite the widening of credit spreads. Thus far, the deterioration of credit markets has been orderly, but we are watching closely for any spill-over into volatility markets.


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.

This report has been prepared solely for discussion purposes only and does not necessarily purport to be a complete analysis of the topics or presented. It has been based on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the information in the report is accurate or complete. Any views expressed in the report reflect our judgment at this date and are subject to change without notice. Certain information may be based upon or represent forward-looking statements. Statements that are forward-looking involve known and unknown risks and uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

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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.

Investment involves risk, including possible loss of principal. The prices of securities fluctuate, sometimes dramatically. The price of a security may move up or down, and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling securities.

Past performance is no indication of future results.



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