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The VIX Is Still Screaming ‘Accident,’ Nomura’s McElligott Cautions
US electricity markets grappling with a vicious deep-freeze aren't the only places where a supply/demand imbalance has created fragility threatening to catalyze an "accident."
That's also the situation in the vol complex, Nomura's Charlie McElligott said Tuesday, reiterating a handful of key points discussed in several recent notes.
Like electricity in some frozen locales across America, forward vol "has been bid only," McElligott wrote, citing a set of what, by now, should be familiar "demand
Volatility shock takes time to unwind. The inflation narrative currently being jawboned is highly suspect, in terms of treasury rates. The 10-yr is being pushed as a significant wake-up call, but most likely within 6 months that dog won’t hunt, because real growth isn’t likely to explode. I think we see the strange pandemic financial disconnects phase out slowly, leaving us with low rates and unrealistic asset levels. If anything, people will continue to be hyper-vigilent and over-reactive — versus the exact opposite of where they were for the last decade or so, i.e., hesitant and unsure, unwilling, frozen.
Thus, as everyone waits on the edge of their anxiety filled doubts for the massive pandemic to explode, the bubble will grow denser and volatility will be more normal — something to look away from and ignore. In that framework, people who have been chugging along in relative safe pension positions will grow increasingly disturbed by YUGE gains to penny stocks — and the bubbles will wobble and chaos will chug along, until the overall global pandemic actually, realistically subsides and fades away for the vast majority.
Here’s a glimpse from FRED of volatility with 2 yr, 5yr and 7 yr treasuries:
https://fred.stlouisfed.org/graph/?g=B7MB