Macro Volatility Digest
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Cross-Asset Volatilities Subside on De-Escalation of Trade Tensions
Cross-asset implied volatilities declined modestly last week as Thursday’s US-UK trading framework announcement bolstered market sentiment ahead of this past weekend’s fruitful Sino-American trade negotiations. Nonetheless, despite moderating for the 3rd successive week, implied volatilities across the major asset classes remain at elevated 80+ percentile levels, reflecting continued investor wariness with respect to recessionary pressures.
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WHAT STANDS OUT:
- Cross-asset implied volatilities declined modestly last week as Thursday’s US-UK trading framework announcement bolstered market sentiment ahead of this past weekend’s fruitful Sino-American trade negotiations. Nonetheless, despite moderating for the 3rd successive week, implied volatilities across the major asset classes remain at elevated 80+ percentile levels, reflecting continued investor wariness with respect to recessionary pressures.
- Following last Wednesday’s FOMC in which the Fed issued a statement noting that “uncertainty about the economic outlook has increased further” and “the risks of higher unemployment and higher inflation have risen”, the Fed Fund futures markets have reduced the number of rate cuts for this year by a full point. FF Futures are now pricing in 2.2 cuts by Dec (vs 3.2 cuts prior to the FOMC).
- The VIX® Index underperformed skew by 1.2 pts over the last week. As shown in the Exhibit below, this VIX underperformance is due to a flattening in the S&P 500 skew gradient (1M 25-delta ratio skew declined from 90th to 72nd percentile). Most notably, the flattened skew has extended to the call side wing implied volatilities which suggests traders are positioning to monetize a 2+ stdev rally on the back of this past weekend’s US-China trade negotiations
Chart: Skew Flattens as Puts Sold to Fund Upside Calls
Source: Cboe
