SectorSPDR: 11:08AM EST
Spot VIX is down to around 15.50 as US stocks (SPY, DIA, QQQ, IWM) leisurely digest the NFP payroll report released this morning. The yield on the 10-Yr US Treasury is down a smidge, and international equities (ACWX, VGK, AAXJ) traded without much action in their Friday sessions.
Thoughts on Volatility
The official U3 unemployment rate as per NFP is still at 3.7%. Not bad considering the 10+% that we came from 10 years ago. The August payroll figure was not all that impressive in terms of the headline number, and it is certainly difficult to argue that demand for new workers is raging if the NFP trend is any indication.
Man that's a good question! I do believe that rate cuts are warranted, though I think a case could be made just to hold unchanged. Of course, the Fed has already signaled for a rate cut at its upcoming meeting, so it's highly unlikely that they'll change course.
Markets appear comfortable with the "Kudlow dichotomy" of an economy that's doing pretty well, and yet needs some rate cuts to help perk it up. That has been a pretty steady macro piece of the stock market's bounce higher in 2019, along with the associated reduction in volatility.
There is some uncertainty with respects to how to interpret the current state of the yield curve. The entire curve basically lives at or below the Fed Funds rate, which itself is not very high. The question on policymakers mind is "Why"?
My take is that global equities are doing pretty well, and even oil has held up decently in 2019 on the whole. I don't think we're in for some kind of economic armageddon, as the yield curve might have us believe. The volatility on any accelerated bounce back in yields, especially beyond some critical point (such as 4% on the 10-YR note), would be pretty scary. For now though, stable rates make for stable equities.
Between Chair Powell's July statement that the most recent cut could be a one-and-done, and the ongoing trade-related struggles, VIX had it pretty good between late July and early September. But now traders are settling down, and spot is printing closer to a mid-15 range.
The speed of its trajectory lower needs to be respected. Even though we're at the bottom of the one-month range, I think you've gotta be looking at spot to report between 13-20 as a base case over the next couple weeks.
Neither 2018 nor 2019 have seen much in the way of back-end contango for VX futures. As mentioned yesterday, if you're playing for a continued calming in markets and another run to SPX all-time highs, then SVXY is your instrument. If on the other hand you accept my above premise that we're more in the middle of the range for spot VX and the front-month futures, then the ZIV is maybe a decent way to get short volatility here.
FinanceYahoo, Compiled by Author
Above I have ZIV realized vol percentiles back to January 1 of 2014. Monthly realized vol on the instrument is currently in the 94th percentile - pretty choppy!
ZIV does rebalance every day, and as such high inter-day volatility is not a positive for the ETP. But if it calms down a little, this looks like a good way to get short vol if you believe in a choppy but ultimately sustained drop in the overall term structure.
If this is your first time reading Market Volatility Bulletin, thanks for giving it a try. If you're a regular, I thank you for your ongoing contributions in the comments section.
Thanks enigma - there was a quite a bit of second-guessing regarding how well the recent gains can stick. We've all been down this road before! But what's more important is the driving sentiment and narrative, which seems to be taking on a kinder, gentler tone.
Thank you for reading. Please consider following.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.