Remember this chart?
Yeah, so that’s become something of a mainstay among those of us who enjoy reminding market participants about just how absurdly efficient the central-bank-inspired BTFD trade has become. Basically that visual underscores a point Marko Kolanovic made a while back, which is simply that the time it takes markets to mean revert after geopolitical earthquakes is compressing over time and in the case of Trump’s November victory was reduced to mere hours.
Well on Monday we got what might be fairly described as a supercharged version of that dynamic when buy-the-fucking-populist-dip met market-friendly geopolitical outcome (see below for why this is kind of absurd on its face). The result was a VIX that fell 25% or, more colloquially, the biggest goddamn drop since August 2011.
Given all of that, you might be asking yourself “will vol be anchored again?”
Or maybe you aren’t asking yourself that. Hell, I don’t know.
But Goldman is asking that and for those interested, there’s some (possibly) useful commentary excerpted below.
Price action around the advancement of Emmanuel Macron and Marine Le Pen to the second round of the French election was not particularly surprising to us. Around major political events over the past year implied vol has usually spiked close to the event given late positioning, as being long vol has been a negative carry trade. In the week after these events vol has fallen materially as the events have turned out to be less negative for markets than feared. We view the election of Mr. Macron as French president as most likely, in line with c.85%-90% probability of the same from bookmakers, and we believe he is viewed as market friendly. As a result, we would expect vol to fade markedly as we have seen following previous political events.
Today European implied vol has already fallen significantly (on both the unwinding of hedges and less embedded risk premia, in our view). In the near-term we expect the fall to a lower level to persist, as without material growth concerns we think it is unlikely that vol becomes elevated on a more sustained basis. However, we would not be surprised to see vol reach another local peak at the time of the second round election (and then fall again assuming Mr. Macron is elected), albeit at a modest level, lower than the first round peak given there appears less uncertainty about the second round relative to the first. The ECB meeting on Thursday is also a potential source of risk to low volatility near-term. Our economists’ expectation is a relatively benign meeting, but should the market become concerned about ECB tapering this could push vol higher. Data based on April 21, 2017 market close.
Of course the absurd thing about this – as alluded to above – is that vol apparently can’t remain elevated no matter what happens on the political front. Populist gets elected: vol crushed. Populist looks like she’s going to lose to a globalist candidate in a second round landslide: vol crushed.