Market Volatility Bulletin: Markets Steadily Climb As New Week Commences

Mar. 30, 2020 11:58 AM ETDIA, EWG, EWQ, EWU, IWM, QQQ, SPY, SVXY, USO, UUP, VGK, XLE1 Comment
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The Balance of Trade


  • A reasonably sleepy session in European equities perhaps paved the way for a somewhat more relaxed session for US stocks.
  • Different cultures will take distinct approaches in attempts to strike the right balance between fighting the virus and minimizing economic impact.
  • VIX9D is responding to the somewhat tamer sessions of late in the US markets, perhaps paving the way for a relief rally in the short-vol trade.

CNBC - European Equities, Monday Close

Investors in US stocks (SPY, DIA, QQQ, IWM) appear ready to roll the dice for extended gains as the new week opens up.

As the SA banner suggests, are we seeing signs of selling fatigue? Perhaps so, and that is not necessarily so promising, though at the least it gives investors a chance to regroup.

European equities (VGK, EWG, EWU, EWQ) turned in a mixed session, and as we'll see momentarily, this appeared to set the tone in the pre-market for the US as well. The USD (UUP) picked up some strength relative to the Euro, after posting a week of big losses.

Thoughts on Volatility

S&P 500 futures: pre-market

I've seen some stray posts in the SA comments threads over the last couple weeks from individuals who believe that the overnight futures ought to be shut down because losses seemed to pick up steam after hours.

Maybe that is so, but futures can help offer context and price-discovery when markets open in the morning. I'm not proposing that they are indispensable, but they do add value.

Besides, sometimes the pattern works the other way. Spot VIX is down near 60 again as Monday afternoon trade starts, and volatility is broadly speaking to be lower when participants have access to information. I understand that this might not always be true, but it's a good starting point for debate.

CNBC - 11:58AM EST

WTI's (USO, XLE) threat to dip below the 20-handle may very well have sent equities into a violent tailspin a week or two ago (consider the drop below March 9th $30/barrel breach that helped instigate the ~10% decline in the Dow).

For now, stocks seem to want to hang onto the narrative that the worst is behind us. Of course, that may be true. Furthermore, maybe I am reading my own biases here: maybe markets want to resettle and wait for more data to be released, be it economic or firm-specific.


Responses to the recent crisis are likely to vary based on cultural norms, trust levels between the government and the population, etc.

I've been to Sweden on three occasions. It's a lovely place, with a high GDP-per-capita than the US. The culture lends itself on trust:

  • Trust between individuals and others
  • Trust between individuals and firms
  • Trust between individuals and those in public office

On, Sweden featured as "tied-for-third" as the having the most trustworthy institutions.

One's culture often determines responses, at the individual, societal, and government levels. Some dear friends of mine from Sweden in their seventies are simply staying home, making sure to remain healthy and temporarily suspending grandparent time with their three kids and eight grandkids.

I invite you to read the CNBC report for an alternative perspective on how to combat the virus.

Term Structure

Thank you for this very thought-provoking comment, Hiro Protagonist. I think the better characterization of my philosophy is that whether there is or is not a "natural range" for volatility futures to trade:

We simply cannot yet know what it is, because we are in a new paradigm of unprecedented intervention by players such as the Federal Reserve. Connected to this is.

My own belief is that the market may just post a reasonably convincing recovery, as dip-buyers get their fifteen minutes of fame, only to have the bottom fall out again. Old habits, well established over the last decade, die hard.

As for the term structure, backwardation today is less dramatic than it was at the peak of the VIXplosion from Feb '18. In this sense, one might consider that the current state is less of a sucker punch, and rather a signal that perhaps VX futures traders are trying to adapt to a new reality.

The "forecast", if one adheres to the notion that the futures value is a pure prediction of the corresponding settlement, is for a gradual decline in spot VIX readings, though still considerably elevated in relation to what market participants have grown accustomed to.

VIX9D now prints below the 70-handle for the first time since March 10th (close of 57.38). So on the short-dated end, vols are coming down as well.

If we can get a couple sessions in with less than 2% aggregate moves, the short-dated vol measures are going to swing a heck of a lot lower, putting the SPX options term structure into contango and perhaps creating a sympathetic ripple effect of sorts in the VX term structure. Not to say that this must happen mechanically, but it becomes far more tenable as a reasonable outcome for those looking to gain from a short-vol position (SVXY).

Wrap Up

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