Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter. As tends to happen in the days following a big stock market drawdown, there's a lot of commentary about sentiment and rotation and stuff. We won't be adding to it.
Here instead are a couple of moderately interesting charts from UBS's equity derivatives strategy team, led by Maxwell Grinacoff. The first shows Vix term structure: Vix measures S&P 500 expected 30-day volatility. Because the month we're in is usually easier to predict than the months we're not, the Vix futures curve usually slopes upward.
A downward slope happens when investors rush to buy protection from some immediate threat that's just emerged. Structural inversion, or backwardation, means short-term expectations for market volatility are higher than long-term expectations. Per the UBS chart above, backwardation in response to the midterms was even deeper than the March inflation scare.
That's coming off a long period of unusually low volatility, however... and it's during what has been a very quiet year for marketwide freakouts: The suddenness of last week's move in the options markets was probably exacerbated by deleveraging by funds that harvest the difference between high implied equity volatility and lower realised volatility. At the same time, leveraged ETF exposures fell to near their March lows... on the largest rebalance on record: All of which is exciting, but taken alone probably doesn't represent the start of a new trend. Soc Gen analyst Jitesh Kumar says that a burst of equity volatility was overdue, but it has likely overshot at the index level in the short term. "The recession probability implicit in the Vix level is significantly higher than in other assets like credit spreads, short-term interest rates, rates volatility, corporate profit trends and GDP level," he says: We can reasonably expect a period of calm and retrenchment.
US elections are done, oil's decline has eased inflation worries for now, and the Q3 earnings season is nearly over. The Vix will probably drift back towards its historical anchor in the coming days, absent any shocks or unprompted panics. As it stands, the only potentially market-moving event on the calendar for the next couple of weeks is Nvidia results on November 17 -- and when was the last time anyone connected with Nvidia did anything surprising?.
Source: Financial Times Markets · Summarized by HeadlinesBriefing