‘Very little fear' in market ahead of CPI report, CBOE’S Mandy Xu finds
TLDRMandy Xu from CBOE discusses the current low volatility in the market despite inflation concerns. She notes that the Federal Reserve's non-panic response to inflation has contributed to the stability, as the market tends to panic when the Fed does. Xu highlights that recent strategies, such as synthetic dividend creation, have helped manage volatility spikes, which are typically short-lived. She also points out that the low volatility is not just in equities but across asset classes, including bonds, credit, and currency markets. This suggests that the phenomenon is macro-fundamental rather than due to specific equity market strategies. The discussion also touches on the market's shift from fearing a recession to anticipating a soft landing.
Takeaways
- 📉 Low Volatility: Despite concerns over inflation, volatility in the market is near one-year lows across various asset classes, including equities, bonds, credit, and currency.
- 🧐 Market Complacency: The Federal Reserve's (Fed's) non-panicked stance on inflation has contributed to the market's current complacency and low volatility.
- 📈 Fed's Approach: The Fed's communication that it is not in a hurry to raise rates is seen as a factor in suppressing market volatility.
- 💡 Synthetic Dividends: Strategies such as synthetic dividends can be used to manage volatility spikes, which are often short-lived.
- 📈 April Selloff: During the April market pull-back, there was elevated option activity in the VIX Index Options, indicating positioning for a volatility spike.
- 📚 VIX Options Trade: More VIX options were traded during the April spike than during any point in March 2020, highlighting the market's ability to monetize volatility spikes.
- 🤔 Debate on Volatility: There is an ongoing debate about whether equity market structures or macro fundamentals are the primary suppressors of volatility.
- 🚫 Vol Selling Strategies: Volatility selling strategies are not considered the main reason for low volatility, as the phenomenon is observed across different asset classes and regions.
- 🌐 Global Perspective: Low volatility is seen in both emerging and developed markets, outside of the U.S., suggesting a broader macroeconomic fundamental at play.
- 🛤️ Path to Soft Landing: The market has shifted from fearing a recession to being on a path towards a soft landing, indicating a change in sentiment and expectations.
Q & A
Why is market volatility currently low despite concerns over inflation?
-Market volatility is low because investors have come to terms with the fact that inflation is going to be stickier for longer. Additionally, the Federal Reserve's calm approach to inflation, with no immediate plans to raise rates, is suppressing volatility.
What does Mandy Xu mean by the market being 'complacent' with what used to be big news?
-Mandy Xu is referring to the current market sentiment where significant economic indicators such as CPI reports are not causing the dramatic reactions they previously might have, indicating a level of confidence or complacency among investors.
How does the VIX index relate to market volatility?
-The VIX index is a measure of expected volatility in the stock market. When the VIX is low, it suggests that investors expect low volatility and stability in the market.
What strategies are in place to manage volatility spikes?
-Traders can use strategies such as creating a synthetic dividend, which involves selling off any spike in volatility. This approach can be profitable as volatility spikes tend to be short-lived.
What happened during the April selloff in terms of VIX options trading?
-During the April selloff, when the VIX spiked to 19, there was very elevated option activity in the VIX index options, with more trades occurring than during any point in March 2020, even at the height of the pandemic when the VIX spiked to 90.
What is the role of the Federal Reserve's stance in current market volatility?
-The Federal Reserve's stance is a significant factor in market volatility. If the Fed appears unconcerned about inflation and is not in a hurry to raise rates, this can lead to a suppression of market volatility.
Why might the proliferation of vol selling strategies not be the main reason for low volatility?
-While vol selling strategies can contribute to low volatility in equities, the fact that low volatility is observed across different asset classes and regions where these strategies are less common suggests that macro fundamental factors are at play.
What is the current market's perception of the economic outlook?
-The market has transitioned from fearing a recession to being on a path towards a soft landing, indicating a more optimistic view of the economic future.
How do investors typically react to new economic readings like PPI and CPI?
-Investors closely watch these readings as they can influence inflation expectations and central bank policies. However, the current low volatility suggests that the market is not overly concerned about these readings in the short term.
What does Mandy Xu suggest about the sustainability of the current low volatility environment?
-While the current environment is characterized by low volatility, it is important to note that this could change if there are significant shifts in economic indicators or central bank policies.
What is the general sentiment in the bond, credit, and currency markets regarding volatility?
-Similar to the equity markets, the bond, credit, and currency markets are also experiencing near one-year lows in volatility, indicating a broad-based calm in financial markets.
How do market participants view the potential for a volatility spike?
-Many market participants are prepared for potential spikes in volatility. They often position themselves to take advantage of these spikes, recognizing that they are typically short-lived and can offer trading opportunities.
Outlines
📉 Low Volatility Amidst Inflation Worries
The video discusses the current state of low volatility in the market despite concerns over inflation. Mandy Zu explains that this is due to the market's acceptance of inflation being a more persistent issue and the Federal Reserve's non-alarming stance. The Fed's Chairman, Powell, has indicated that there is no rush to raise rates, which is seen as a factor in suppressing volatility. Strategies are in place to handle volatility spikes, such as creating synthetic dividends, which are sold off when volatility increases. This approach capitalizes on the short-lived nature of volatility events. The discussion also touches on the elevated option activity in the VIX Index Options during the April market sell-off, indicating that many investors were positioning for a volatility spike.
Mindmap
Keywords
💡Volatility
💡Inflation
💡Federal Reserve (Fed)
💡VIX
💡Synthetic Dividend
💡Asset Classes
💡Credit
💡FX (Foreign Exchange)
💡Rates
💡Vol Selling Strategies
💡Soft Landing
Highlights
Volatility trading is near the lows of the year despite worries over inflation.
New readings on PPI and CPI are expected in the next couple of days.
Mandy Xu notes that volatility is low across all asset classes, including equities, bonds, credit, and currency.
Inflation is expected to be stickier, and the Federal Reserve is not panicked about it.
Market panic is subdued as Federal Reserve Chairman Powell has indicated no rush to raise rates.
Strategies are in place to address any volatility spike, such as creating a synthetic dividend.
Volatility spikes are often short-lived, and people are taking advantage of this pattern.
In April's selloff, there was elevated option activity in the VIX index options, indicating a positioning for a volatility spike.
Volatility spikes tend to be very short-lived, as seen when the VIX spiked to 19 in mid-April.
During the pandemic in March 2020, the VIX spiked to 90, but the trading volume of VIX options was less than the April spike.
There is debate about whether there is something structural in the equity market suppressing volatility.
Vol selling strategies are not considered the main reason for low volatility, as it is observed across various asset classes.
Low volatility is also observed in emerging markets and developed markets outside of the U.S.
The current macro fundamental suggests a shift from fearing a recession to being on the path to a soft landing.
Mandy Xu suggests that the market's complacency with what used to be big news is a sign of a broader macro fundamental shift.
The Federal Reserve's stance on inflation and interest rates is a key factor in suppressing market volatility.