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Black Monday (10/19/1987), Black Tuesday (10/29/1929), Black Wednesday (9/16/1992), Black Thursday (10/24/1929) and Black Friday — when Amazon sells stuff cheap. Or is it now 9/23/2022 in the UK?
The following charts serve as a visual retrospective for a historic day of wrong-way vols and correlations.
Since 2012, there are three days when the UKX (FTSE100) and GBP are both down 2%. They are: Brexit (6/24/2016), the pandemic liquidation (3/18/2020) just days before the Fed implemented “QE in an amount as necessary” and Friday.
On 6/24/2016, 10-year gilt yields fell by ~30bps. On 3/18/2020 they rose 24bps (to 80bps) and would be below 50bps (in yield) just days later after the Fed backstop. On Friday, they rose more than 30bps to 3.83%.
It’s incredible how high one-week implied vol on GBP was in the days preceding Brexit (figure below).
Vol was bought at any price in early June 2016, but this feels considerably more significant.
On the left (below) is the correlation of GBP and gilts. The incredibly negative level (weaker FX, higher yields) was touched in 2020, but that was right before the Fed supplied unlimited QE.
On the right (above) is the correlation between EWU and gilts — a massive “taper tantrum.”
Next is realized and implied vol spreads between hedged and unhedged UKX (FTSE100). The big realized vol spread in unhedged (EWU) reflects the surge in “wrong way” correlation between the index and FX. The implied vol spread follows the realized (figure on the right, below).
The large premium of implied vol spread reflects expectations that FX and equity will move together. In the US, the dollar and the S&P 500 remain negatively correlated — a weaker dollar “helps” the SPX. The stronger dollar is a wrecking ball against everything else.
Below is short dated (1m) risk reversal skew in GBP. Again, it’s hard to compare to how much risk premium there was before Brexit, but Friday is up there with the Scottish referendum and the pandemic.
Lastly, activity in FTSE100 options was very heavily skewed towards puts. About 5 to 1.
“In the US, the dollar and the S&P 500 remain negatively correlated — a weaker dollar “helps” the SPX.” I have observed this for years and always wondered why. What is the mechanism that links the dollar to the SPX?
I can think of at least 3 things.
2) A weaker dollar makes American exports cheaper so American companies will sell more and
Oops.
1) The SPX is valued in dollars, so a weaker dollar means it takes more dollars to represent the same intrinsic value.
2) A weaker dollar makes American exports cheaper so American companies will sell more and have higher profits.
3) A weaker dollar lets people from around the world buy more American equities with the same amount of their local currency.
It’s a correlation and not a causation. Both respond strongly relative to interest rates, where the causation is clearer:
Higher rates make stocks worth less
Higher rates strengthen the dollar
The UK’s political leaders have been making a strong case for Communist Party rule.
Next thing you know they’ll be diluting the UK’s global influence and taking a wrecking ball to London’s status as a leading financial center while gutting the UK’s immigrant-led economic growth by leaving the EU. At least by staying in the EU they can defuse Scoxit. But wait …
I have no problem with Truss dressing up as Margaret Thatcher as long as they reopen The Haçienda.