Observations & Insight
Is Another $6 Trillion Stock Slump Coming? Wall Street Can’t Agree
The swings are getting bigger in stocks, and the divide is getting wider among people whose job is to forecast them.
Bank of America strategists led by Michael Hartnett say they see another correction coming, similar to the one in early February when about $6 trillion was erased globally. This year’s turbulence is part of a topping process in which everything from corporate profits to monetary stimulus is peaking, they say.
How rising volatility took away the stock market’s ‘security blanket’
William Watts – MarketWatch
The stock market can continue to rise, but the ultralow volatility backdrop that accompanied the relentless 2017 rally is gone and investors will need to adjust, said a pair of quantitative analysts at Société Générale.
While the U.S. macroeconomic picture has seen only a whiff of higher U.S. inflation and wages, “it should no longer provide a security blanket for risk takers,” wrote Jitesh Kumar and Vincent Cassot in a wide-ranging Wednesday note that cited a variety of factors that have effectively set the stage for a return to more normal levels of volatility.
Volatility Is Back But Volatility Funds Are Duller
Spencer Jakab – WSJ
Capital Decimation Lite, anyone?
Volatility is back in the stock market, but the investments that imploded spectacularly in February are gone except for one survivor. That fund is now a much tamer version of its former self.
The market upheaval in early February was a lesson the how quickly long-term compound returns can evaporate. The wildly popular VelocityShares Daily Inverse VIX Short-Term ETN, ticker symbol XIV, was designed to return the opposite of a basket of futures contracts on the Cboe Volatility Index, known as the VIX.
Stop Worrying About Volatility and Watch Stock Options
Ash Alankar – Bloomberg
The wild gyrations in capital markets in early February had a profound impact on investor sentiment. The spike in implied volatility, as measured by the CBOE Volatility Index, or VIX, roiled long-pacific markets, leading investors to question even now, almost a month later, whether a sustained selloff might be looming. According to signals from the options market, the answer is a definite no.
New Regime of High Volatility Defied by These Crucial Metrics
Dani Burger – Bloomberg
Investors preparing for an era of higher volatility may want to take a pause: A sustained period of price swings isn’t in the cards quite yet.
Changes in volatility measures may only be short-term reactions rather than a wholesale regime shift, offering a potential tonic to traders who have been on edge since inflation data punched up turbulence in late January. That handed global stocks their worst month since 2016, while U.S. 10-year yields marched to the highest in four years.
Bond Bear Market: Why Investor Fears May Be Overblown
Kathy A Jones – Charles Schwab
Should fixed income investors be afraid of a bond bear market? It’s a question a number of people have asked me recently.
Historically, bond bear markets tend to come and go relatively quickly, leaving investors who stayed in the fixed income market relieved they didn’t jump out. Nevertheless, because so many people have expressed fear of the current bond bear market, it may be useful to take a deeper dive into how various types of bonds have performed during bear markets. As we always say, past performance is no guarantee of future results, but perhaps a look back can be enlightening.
Exchanges and Clearing
Nasdaq sues IEX for allegedly infringing technology patents; Rival claims move is attempt ‘to obstruct an innovative new competitor’
Nicole Bullock in New York – FT
Nasdaq is suing rival IEX, alleging the upstart exchange knowingly violated a series of Nasdaq patents in developing its trading platform.
Exchange operators want volatility, just not too much
Aparajita Saxena – Reuters
Wall Street analysts wasted no time in raising forecasts for exchange operators CME Group Inc and Nasdaq Inc after last month’s historic stock market volatility, but industry watchers warned the companies may suffer if the selloff becomes deeper and more prolonged.
The stock, currency and commodity trading platform providers who make more money the more times investors trade on their systems have been struggling for years with decreased volumes driven by persistently low volatility, which keeps traders out of markets.
****JB: If “Goldilocks Volatility” isn’t a thing yet then it should be.
OCC Announces Cleared Contract Volume Up 43 Percent in February
OCC, the world’s largest equity derivatives clearing organization, announced today that total cleared contract volume in February was 477,587,355 contracts, up 43 percent from February 2017 volume of 333,411,251 contracts. OCC’s year-to-date average daily cleared contract volume is up 39 percent from 2017 with 23,934,996 contracts.
Options: Overall exchange-listed options volume reached 464,869,500 contracts in February, up 44 percent from February 2017. Equity options volume reached a total of 398,009,570 contracts, a 40 percent increase from February 2017. This includes cleared ETF options volume of 198,333,703 contracts last month, a 15 percent increase over February 2017 cleared volume of 173,248,941 contracts. Index options volume was up 70 percent with 66,859,930 contracts in February.
Year-to-date average daily equity options volume is up 37 percent with 20,241,493 contracts in 2018, while year-to-date average daily index options volume is up 58 percent with 3,077,864 contracts this year.
CME Group Reaches Highest-Ever Monthly Volume of 27.3 Million Contracts for February 2018
CME Group, the world’s leading and most diverse derivatives marketplace, today announced it reached an all-time high monthly average daily volume (ADV) of 27.3 million contracts during February 2018, up 48 percent from February 2017. This milestone surpasses the prior peak of 20.9 million contracts in November 2016 by 31 percent. During 2018 to date, there were 26 trading days with volume above 20 million contracts, compared with four days during the same period in 2017. Open interest at the end of February was 130 million contracts, an increase of 11 percent from the end of February 2017, and up 21 percent from year-end 2017.
DGCX Volumes Register Substantial Growth YoY, Hit Fresh Record ?in February
Total trading volumes on Dubai Gold and Commodities Exchange (DGCX), the region’s leading ?commodities derivatives venue, touched a record new high of 2,097,739 contracts in ?February, registering the exchange’s highest overall monthly value of above $47.03 billion.?
Nasdaq Announces the Board of Directors of its Canadian Exchange
Nasdaq, Inc. (Nasdaq:NDAQ) today announced the full slate of directors of Nasdaq CXC Limited (“Nasdaq Canada”): – business.nasdaq.com
Dan Kessous, CEO, Director
Michael Foulkes, Chairman, Independent Director
Tal Cohen, Director
Gerald Throop, Independent Director
Mary Anne Wiley, Independent Director
Thomas A. Wittman, Director
Long VXX, Short UVXY? An Analysis By Year
Traders frequently want to work off reliable relationships when assessing the long-standing attractiveness of a strategy.
Our recent article discussed how the ProShares Ultra VIX Short-Term Futures ETF correlated on a daily, weekly, and monthly basis in relation to various other volatility proxies. An example correlogram from the study can be found below:
Multicurve modelling is about to get more complex
Nazneen Sherif – Risk.net
The widening of the spread between the Libor and overnight indexed swap (OIS) rates post-crisis spurred the development of the so-called multicurve modelling framework.
The pricing of derivatives with the Libor rate as the underlying, such as swaps, requires the modelling of the Libor forward rate curve on which the cashflows of the derivative are based. In order to price the derivative, the cashflows are then discounted using an appropriate discounting rate, which used to be Libor prior to the crisis.