Observations & Insight
‘Volatility of Volatility’ Is Major Threat To Financial Markets – Beschloss
Neils Christensen – Kitco News
While markets continue to enjoy an unprecedented period of low volatility, the chief executive officer of one global investment management firm warns that investors cannot be complacent.
Speaking to Kitco News on the sidelines of the 24th annual International Economic Forum of the Americas in Montreal, Canada, Afsaneh Beschloss, founder and CEO of Rock Creek, said that the growing threat to financial markets is the “volatility of volatility.”
Quant Funds Are Selling Stocks With Hidden Volatility Building
Dani Burger – Bloomberg
A record spike in equity volatility couldn’t get the quants to sell, but bubbling market stress below the surface has finally spurred them to offload.
Quantitative hedge funds on Credit Suisse’s prime services platform have ended their 18-month streak of relentlessly buying stocks. They’ve reduced exposures by about 10 percent over the past two months through the end of May. Over the past week or so, such funds have held broadly steady.
Hedge-fund boss who predicted ’87 crash sees stock market, bond yields set for ‘crazy’ tandem rise
Mark DeCambre – MarketWatch
Paul Tudor Jones, a hedge-fund luminary, said he’s expecting bond yields and stocks to rise in tandem toward the end of 2018.
“I think you’ll see rates go up and stocks go up in tandem at the end of the year,” Jones told CNBC Tuesday morning. He makes the case that real rates remain historically low and that rising yields, which move inversely to bond prices, won’t deter investors from buying stocks.
How The S&P 500 Lost Its Fed Bump
Simon Moore – Forbes
For decades, there was a bizarre, but persistent theme in the markets. The S&P 500 would rise in anticipation of regularly scheduled Federal Reserve (Fed) rate decision announcements. In the 24 hours before the Fed made its interest rate decision, the S&P 500 could rise as much as 0.5%. With Fed meetings occurring typically eight times a year, that means on average, around a 4% annual return just by investing for eight 24-hour periods and taking what appeared to be little risk.
Time To Sell? The Stock Market Could Be Underestimating Trade War Risk
Laurence Kotlikoff – Forbes
About 15 months ago, I wrote a column for the Seattle Times, the Dallas News and some other papers entitled, “Now Might Be the Time To Sell Your Stocks.” I focused, in part, on the risk of a trade war. Unfortunately, my advice came a year too early. The market continued to rise thanks, in part, to the passage of the tax reform.
Having royally screwed up in my first-ever market forecast, I’ve foresworn prognostication. But avoiding calling the market is not the same as pointing out that the VIX — the standard measure of market risk — has been far higher this year than last year, roughly 50%, and that standard portfolio theory tells us to reduce our holdings of risky assets when their risk rises.
Italian debt strife reveals pitfalls of Europe’s market structure
Philip Stafford and Kate Allen – Financial Times
The gyrations in the Italian government bond market have revealed how Europe’s liquidity-starved sovereign debt markets are being heavily tested by even short bouts of political instability.
The rapid rise and fall in yields in the eurozone’s largest debt market in recent weeks has been exacerbated by thin sovereign debt liquidity.
BlackRock Sees Emerging Markets Defying Political `Bad News’
Ben Bartenstein – Bloomberg
Rising political risks during the global economy’s most important week of the year shouldn’t deter investors from emerging markets, according to the world’s largest asset manager.
While Argentina, Turkey, Brazil and Mexico have seen big price swings in the past few weeks, most developing nations appear on solid footing, said Isabelle Mateos y Lago, the chief multi-asset strategist at BlackRock Investment Institute. A proprietary indicator from BlackRock Inc.’s analysis unit shows investors perceive the world as riskier than the all-time average, but not at levels seen during the invasion of Crimea or the Arab Spring.
Exchanges and Clearing
Growth in Eurex Sector Derivatives continues to thrive
Sector index derivatives are one of the fastest growing segments on Eurex Exchange. A testament to their growing popularity, over 90 million sector index futures and options contracts were traded at Eurex Exchange in 2017. That’s a 25 percent increase in volume year-on-year. Average daily trading volume was 223 thousand futures and 113 thousand options contracts during 2017. In the first quarter of 2018, the volumes increased 23 percent year-on-year, with March 2018 being a record month for EURO STOXX Sector Index Futures for contracts traded, with 9.6 million. Year-to-month 2018, we have seen a total of 44.5 million EURO STOXX Sector Futures and Options traded.
Chinese regulator approves launch of corn, cotton options: exchanges
China has approved the launch of corn and cotton options, two of the country’s commodity exchanges said, as it expands the range of tools available to hedge against price-swings in agricultural markets.
China launched soymeal and sugar options earlier this year, the first agricultural derivatives products in the world’s biggest commodity market.
Wave of calm coming to markets, and Credit Suisse has a way to profit
Keris Lahiff – CNBC
Just as investors have grown accustomed to bigger market swings, one strategist says we should return to calmer trading in the back half of 2018.
Jonathan Golub, U.S. equity strategist at Credit Suisse, expects a situation reminiscent of 2017, one of the smoothest periods of trading in Wall Street history. He anticipates this even as President Donald Trump lobs geopolitical curveballs at markets such as trade tariffs against some of the nation’s closest allies.
How to weather — and potentially cash in on — the upcoming market crash
Shawn Langlois – MarketWatch
The end of the bull market is upon us. Or maybe it’s really close. Getting closer? Nobody really has a clue on the timing, of course. The only thing we do know for sure is that the fun has to end eventually.
The important question: Will you be prepared for it?
There’s the standard advice you’d hear from any number of standard-issue financial advisors: Stay the course. Craft a plan and stick to it. Eye the long term and ignore the day-to-day fluctuations.
David Kotok – Seeking Alpha
On day 1, our econometrics professor warned us to be careful with correlation: A strong correlation doesn’t necessarily mean causality. This is the case with the VIX. It’s closely related to the S&P 500 with a negative correlation, but the relationship may not be causal. I will never forget the example our professor gave us: The number of people who have drowned by falling into a swimming pool, it turns out, is highly correlated with the number of movies Nicolas Cage has filmed. Unlike school vending machines that can be causally linked to childhood obesity, Nicolas Cage didn’t need a scientific study to prove his innocence.
Why going beyond stocks and bonds can boost your portfolio in high-risk markets
Martin Pelletier – Financial Post
Perspective is everything, especially when it comes to defining risk. A person’s background and their experiences all help shape this perspective but one factor has the greatest influence — fear of missing out (FOMO).
People hate missing out on opportunities. Seeing others prosper while being left behind can be harder psychologically than actually losing money. So it isn’t surprising that investors often chase recent performance, which can result in a highly concentrated portfolio loaded up on risk.
Consumer inflation rising at fastest pace in 6 years, CPI shows
Jeffry Bartash – MarketWatch
The numbers: A measure that tracks consumer prices shows the cost of living is increasing at the fastest pace in six years, reflecting a strong U.S. economy and ultra-tight labor market that’s stoking inflation.
The consumer price index increased 0.2% in May, the government said Tuesday, in line with Wall Street’s forecast. The report came out one day before a Federal Reserve meeting in Washington that’s expected to result in another increase in U.S. interest rates.