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Market Volatility Bulletin: Stocks Give Optimism Another Try

May 05, 2020 11:23 AM ETAAXJ, DIA, IWM, QQQ, SPY, SVXY, UVXY, VGK, VXX2 Comments
The Balance of Trade profile picture
The Balance of Trade


  • US stocks emerged with a winning session on Monday, and are giving "green" another try in Tuesday's session.
  • The German Constitutional Court has given the ECB three months to "fix" QE to bring it in line with treaties. doesn't seem to bother risk assets too much.
  • The VXX implied vol term structure is reasonably flat, with a dip at the front end. more closely resembling the pattern from six months ago when calm reigned the markets.

Market Intro

Another day in paradise! After a tough beginning to the month of May, US stocks (SPY, DIA, QQQ, IWM) pushed through a down Monday pre-market and managed to close out the day a winner. Tuesday is tacking on gains, as investors are giving another crack at the recovery narrative.

This on the heels of a positive session for European markets (VGK) and a mixed session in Asia (AAXJ).

Thoughts on Volatility

It's an interesting question. In theory, no taxation ever needs to occur: governments can just print and then spend the money they want. So, government spending is basically accomplished by:

  • Taxation in the Present
  • Currency devaluation
  • Borrowing (Taxation and/or Currency devaluation in the future)

Endless borrowing is not a viable solution, and governments may not have as much runway as they seemingly believe as it relates to the problem at hand.

I must confess that I've wondered whether the Italian and Spanish economies shut down to such a large degree in part because they figured it would make is easier to borrow from a larger body like the ECB.

As mentioned, European and US stocks are higher today, and the Euro has only weakened a tad against the USD. So for now the story is being treated as something of a "nothing burger" - and unfortunately, it probably is (Who cares about treaties?).

Germany is right to openly question the extent to which it is the ECB's role to create pinpointed support for segments of the Eurozone economy, rather than the economy as a whole. The counterargument is that saving the whole sometimes means saving the part. And that's true, except that such allowances are easier to make when debt levels in the parts that need saving were low to begin with.

The S&P is nearing

This article was written by

The Balance of Trade profile picture
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