Thu, Feb 28, 2019 - Page 12 News List

Volatility on markets too quiet for some analysts


The rally thundering across markets has done more than just drive up prices, it has pushed down volatility.

Markets around the world have started the year on a tear encouraged by easing trade tensions, a more dovish-sounding US Federal Reserve and signs that China is bolstering its economy. Volatility gauges have responded.

The CBOE Volatility Index touched its lowest level in four months last week, while the Merrill Option Volatility Index, which monitors US Treasury options, is near a four-month low. The JPMorgan Global FX Volatility Index ended Tuesday at the lowest reading since April last year.

“Volatility instruments have all but completely normalized,” Westpac Banking Corp head of FX strategy Richard Franulovich wrote in a report on Tuesday, noting that relative levels of equity, bond, currency and high-yield credit volatility all declined significantly from late last year.

“It’s not too often that we see such coordinated levels of comfort. Usually when one market is calm, another is undergoing upheaval. There’s usually at least one outlier, unlike now when there really aren’t any,” Sundial Capital Research Inc founder Jason Goepfert said.

According to Goepfert’s analysis, when “volatility in everything” drops below 10 percent, 10-year US Treasury futures are generally positive up to a year out, while the VIX and crude oil tend to rise one month and two months out. The US dollar might weaken one to two months afterward.

Cantor Fitzgerald chief market strategist Peter Cecchini, who is among the most bearish on the S&P 500 with a 2,390 target, on Monday said in a note that he is watching for VIX front-month futures to drop below 15 to “confirm an overtly bearish view” on the gauge.

BTIG strategist Julian Emanuel sees depressed volatility as an opportunity. He recommends using options to maintain upside exposure to further potential gains in US equities without as much downside as an outright long position.

“Owning exposure through options makes a ton of sense to us” given how cheap they currently are, he said.

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