As you get your week started and as you prepare for the ECB to try and figure out how to walk back the message Mario Draghi seemed to be conveying in no uncertain terms late last month in Sintra, it’s probably worth noting that for the time being, all that’s going to matter is last Friday’s lackluster CPI print and the extent to which it underscored the notion that there’s little evidence to support the idea that weakness in inflation is “transitory.”
So, for the time being, it’s “carry” on – as it were. That’s what we saw overnight in Asia (well, outside of China, where a small cap mini-meltdown weighed heavily on the other benchmarks).
And as Goldman reminds you, it isn’t just that vol. is suppressed across assets – it’s also suppressed in macro:
Both macro and market volatilities have been remarkably low. Volatilities of GDP growth, inflation, and payroll employment are below half of their post-war averages (Exhibit 1), and volatilities in equity and bond markets are near all-time lows (Exhibit 2).
While geopolitical risks and other “unknown unknowns” could trigger volatility spikes, recession risks are still low, vol-selling positions do not appear to be exceedingly crowded, and historical data suggest low-vol regimes can persist for a while.
When you think about low macro vol., don’t forget that even when we do get a surprise, rates are becoming less and less responsive – something we detailed earlier this month in “‘Simply Said’, Shit Just Isn’t That Volatile.”
As for credit vol., well, there just isn’t any.
Indeed, if you contrast implied vol. in credit with vol-of-vol in equities, the juxtaposition is stark and further underscores the notion that credit may be the most listless asset class of them all:
(BofAML)
For their part, Morgan Stanley thinks that may be about to come to a rather unceremonious end. “Low level of volatility is a sign of complacency in credit,” the bank said in a note out last week. “We believe recent hawkish rhetoric out of many global central banks, on top of the Fed pushing ahead with its plan to continue hiking rates while shrinking the balance sheet, is a potential catalyst for vol. to rise again.”
As for equity vol., JPMorgan Asset Management’s John Bilton and Katherine Santiago want you to know that there’s nothing to be concerned about.
“Current VIX levels are reasonable from both a structural and cyclical point of view and could last for a while yet,” the duo says in a new note. Here are some other highlights:
- Say low average pair-wise stock correlation, subdued realized volatility and the impact of volatility-linked ETFs are all weighing on the VIX
- Say cyclical conditions ultimately drive shifts in volatility regimes, U.S. economy moving slowly through late-cycle phase which is historically associated with lower volatility
- Would need to see ‘meaningfully’ tighter financial conditions and a broad-based deterioration in key macro indicators to indicate a structural shift in the volatility regime
- Say remain confident economy is on a ‘sound footing’ and so see scope for lower levels of VIX to persist for some time yet
Trade accordingly.
