Displaying items by tag: volatility

Thursday, 18 May 2023 13:35

Volatility Ignoring Regional Banking Stress

In an article for MarketWatch, Jamie Chisholm discussed some reasons for why stock market volatility has remained depressed despite the ongoing crisis in regional banks which some fear could lead to a credit crunch. In contrast, the stock market seems more responsive to economic data and the Federal Reserve. 

Economic data continues to signal an economy that is growing albeit decelerating but also not in a recession which would hurt corporate earnings. Q1 earnings also have come in stronger than expected. 

The Federal Reserve is in the final innings of its rate hike cycle. Futures markets are already looking ahead at rate cuts by the end of the year or Q1 of next year. And, inflation data continues to moderate and move in the right direction which is also supportive of asset prices. 

It’s also surprising that the market seems unconcerned about the debt ceiling deadline and a potential default, although there has been chatter about positive progress from negotiations between Republicans and Democrats. Surprisingly, the regional bank crisis is having little spillover impacts on the market or economy. In fact, the S&P 500 is 3% higher than from when the crisis began, while the Vix is nearly 10% lower. 

Finsum: One mystery for market participants is that volatility remains depressed despite ongoing struggles for regional banks and a looming debt ceiling deadline.

Published in Eq: Total Market

In an article for MarketWatch, Mike Murphy covered a recent report that state and federal regulators are examining unusual trading patterns behind the recent volatility in bank stocks. Notably, the entire banking sector and specifically regional banks, have been subject to heightened volatility and heavy short-selling in recent months following the failures of banks like Signature Bank, First Republic, and Silicon Valley Bank.

In recent weeks, there have been big declines and large amounts of put buying in the stocks of regional banks like PacWest, Western Alliance, and Zions. The core challenge for these banks is that they made long-term loans at much lower rates, yet they have to increase short-term deposit rates or risk depositors leaving for higher rates elsewhere. And the risk of this deposit flight increases if concerns about a bank’s financial health increases.

Both the White House and the SEC noted the short-selling pressure on banks possibly contributing to the volatility. In a statement, SEC Chair Gary Gensler said, “In times of increased volatility and uncertainty, the SEC is particularly focused on identifying and prosecuting any form of misconduct that might threaten investors, capital formation or the markets more broadly.”

Finsum: With increasing volatility in the banking sector, regulators and public officials are examining short-selling and put buying as factors that may be adding to volatility.


Published in Bonds: Total Market

In an article for Reuters, Mike Dolan discussed the widening gap between market volatility which has been trending lower since October of last year and headlines of various geopolitical, financial, and economic risks that are increasingly dominating headlines. The Federal Reserve is expected to hike rates despite signs that the economy continues to decelerate, considerable stress in the banking system, increasing chatter of a ‘technical default’ for the US Treasury if the debt ceiling is breached, and important data points in the coming weeks in the form of earnings from tech giants and the April jobs report. 

Despite these potential threats, the VIX, which measures stock market volatility, reached its lowest levels since November 2021. The stock market is also nearing a 20% move rise from its October lows, which many market participants would define as a new bull market. Volatility is similarly depressed in the Treasury market and the currency markets despite upcoming central bank meetings, indicating that this divergence between the VIX and headline risk is not unique to equities.

Finsum: There is a widening gap between various headline risk and market measures of volatility which are at multi month lows. 

Published in Eq: Total Market

In an analyst note, JPMorgan’s Chief Equity Strategist Marko Kolovanic discussed the anomaly between an increasingly shaky market and economic outlook, in contrast to the S&P 500 volatility index (VIX) which continues to trend lower. 

A week ago, the VIX dropped to 16 which is its lowest level since November 2021, despite the S&P 500 being 16% lower compared to 17 months ago. Yet, economic growth continues to decelerate, inflation is meaningfully higher, and the Fed remains in a hawkish posture. 

Kolovanic notes that we are not likely to see any abatement of these pressures in the coming months given the tightening of financial conditions and rising recession risk, while the Fed’s priority remains stamping out inflation even at the expense of the economy and labor market. Further, he notes stress in the banking system and drumbeat of rising tensions regarding China, Russia, and an upcoming election cycle.

He says depressed volatility is due to technical reasons, primarily the selling of short-term options which leads to dealer buying of stocks and volatility leaking lower. Adding to this is continued resilience in Q1 earnings while many were anticipating a meaningful decline. 

Finsum: Volatility is at 17 month lows despite stocks being much lower. JPMorgan’s Marko Kolovanic explains some reasons behind this discrepancy. 

Published in Eq: Total Market
Sunday, 23 April 2023 06:09

Banking on volatility

With the waters of volatility in the banking sector taking five – or, perhaps, 10 – the market’s turning its sights to some incomplete biz: disinflation, according to swissre.com.

Due to “decisive government and central bank actions,” what might have ballooned into a systemic financial sector crises – on both sides of the Atlantic, at that -- which would have put a damper on merging markets, was sidestepped. But stemming from stubborn core inflation pressures and tight labor markets within advanced economies, in May, the Fed and European Central Bank’s expected to hike policy rates.

Meantime, call it a game of adjustments.

In the first quarter, Gateway, which is focused on low-volatility equity investments, made adjustments in its portfolio, according to barrons.com.

The low down: it wielded the scissors, shoring its stake Apple stock and putting the old slash on its General Electric investment. At the same time, it purchased Altria Group stock (MO). The stock trades – as well as others -- were disclosed by Gateway in a form it filed with the Securities and Exchange Commission.

Published in Eq: Financials
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