Macro Vol Commentary
The move lower in global equities caught many investors off guard. The shift in risk sentiment was widespread and drove realized volatility across global markets significantly higher. The sharp increase in realized volatility has been primarily centered on global equities despite the original catalyst being a spike higher in US rates on October 2nd.
The October sell-off of risky assets, especially in domestic equity markets (SPX, RTY, NDX) has not been accompanied by the dramatic spike in implied volatility (VIX) that was seen in February, with the VIX reaching a high of 50 in Feb-18 and only reaching the mid-20s in Oct-18. We expect further air pockets of volatility across asset classes as a packed calendar of macro catalysts including the US mid-term elections, Brazil presidential election, Brexit deadline, and global trade war tensions could lead to a continuation of recent bearish price action and increasing realized volatility.
Meanwhile in Europe, the Italian debt downgrade appears to continues to weigh heavily on investor sentiment, while European equities continue to underperform with the Euro Stoxx 50 now down 9.7% YTD. The volatility of the Euro Stoxx has remained low due to the sharp increase in the 3-month correlation between the SX5E Index and EURUSD (+33.9%), which has dampened the daily moves during stress events. We believe the seemingly perpetual bearish sentiment around global trade and geo-politics make for an attractive environment for cross asset volatility investors.
Asia has been a laggard with most indices now down 10-12% during the month. Despite these large moves, 2-3 year implied volatility had only a modest move higher, and has created attractive entry points for long volatility positions in NKY, Kospi2 and HSCEI.
Cross-Asset Volatility Monitor
October has created a reset higher in realized volatility across global equities, while volatility in rates, credit and FX has remained subdued. As a result, US, European and Asian equity indices screen as potentially attractive volatilities to buy in the short-term, especially call spreads in the US. The muted moves across other asset classes combined with the move higher in implied volatility, has caused FXE, FXY and HYG to screen as potentially expensive volatilities. Global markets appear to remain fragile and prone to short-term dislocations. The removal of central bank liquidity has tightened global financial conditions. Global equity markets will need to find a new equilibrium in an environment where buying every 5% dip may no longer be a successful investment strategy.
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.
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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