Earlier on Saturday we brought you the latest update on the record spec net short in VIX futs.
In that same post, we reminded you that seasonality is not on your side if you’re betting on comatose markets to remain … well … to remain comatose.
Something else that’s not on your side is politics. Of course so far, the global central bank liquidity tsunami has managed to suppress cross-asset vol. even in the face of myriad political land mines that ran the gamut from Brexit, to Trump, to France very nearly electing a fascist.
One thing that’s worth remembering as you ponder the juxtaposition between record low vol. and turmoil Inside The Beltway, is that we are fast approaching a political situation with direct implications for markets.
And the last two times we’ve bumped up against this same debate, the VIX did not respond well.
Here’s Deutsche Bank with the chart of the day and a bit of useful color…
Via Deutsche Bank
The US debt ceiling represents the next major risk event for global markets. Currently, the CBO projects the so-called “drop dead” deadline is sometime in early to mid October. Last week, investor anxiety had started to surface in the Tbill market, with the rates on bills maturing around the projected deadline being pressured higher. On the bill curve, a “hump” has formed around the October maturity bills, with their rate 3bp to 5bp higher compared to the surrounding issues.
Equity market reacted during [the] two [previous] episodes as VIX increased from 13 to 20 in 2013 and from 16 to 25 in 2011 (and rose further as the eurozone crisis worsened in August 11). So far, nothing seems to be priced in this market (see graph). It is worth noting that in both cases, financial markets seems to have given the benefit of the doubt until up to two weeks ahead of the deadline.
That White Swan might beget some darker children.
orange swan is at 1600 Penn.