Date: August 23, 2019
Stock Hedges a Steal as VIX Flashes Calm Ahead of Fed Speeches
“The Cboe Volatility Index, or VIX, has fallen back quickly after spiking earlier this month — a little too quickly, according to some. And that may spell opportunity. As the Jackson Hole summit looms, Wall Street banks say options are now looking decidedly cheap to hedge a backlash against the Federal Reserve’s interest-rate policy. After spiking as high as 24.59 earlier this month, Wall Street’s fear gauge closed on Thursday at 16.68, below its one-year average. “We are seeing the VIX trade at a notable discount to realized volatility,” said Michael Purves, CEO of Tallbacken Capital Advisors, LLC. “We recommend using this dip in implied volatility to put on incremental equity market hedges.” BNP Paribas SA likes so-called S&P 500 put ratio trades for a Jackson Hole hedge. Strategists there suggest weekly options expiring Sept. 3, such as buying S&P 500 2800 puts while selling 1.5 times that number of 2700 contracts. A large number of VIX options trades from a select few players may have contributed to the decline in implied equity price swings. The knock-on effects of those wagers may be pulling down the gauge and perhaps even boosting the S&P 500 Index in turn, Nomura Securities International Inc. strategist Charlie McElligott said. The VIX has slumped quickly, but “the normalization will be short lived, given that trade, macroeconomic fundamentals, and earnings backdrop continues to deteriorate,” according to Cantor Fitzgerald Global Chief Market Strategist Peter Cecchini. He sees Fed communications from Jackson Hole likely failing to deliver the “needed policy fix the markets now require.” He recommends put spreads — where contracts are bought and sold simultaneously — as a hedge. UBS Group AG strategist Stuart Kaiser also says the VIX appears too low relative to the firm’s models. As for Purves, he’s a fan of bearish put options, or put spreads, on the Nasdaq 100 ETF because of the gauge’s low implied volatility relative to the S&P 500. “To be short volatility right now you have to assume that realized volatility will become quite sleepy in September,” Purves said. “We find it hard to think either implied or realized volatility will slumber much in the coming weeks.” ”
Pound Could Find a Floor at $1.17 in Overwhelmingly Short Market
“The pound’s sudden surge Thursday made one thing clear: after an almost 9% tumble from the year’s highs, it may now be close to a floor where value hunters are waiting. In a market that’s overwhelmingly short the currency, a further decline of about 4% may tempt buyers back in, according to some strategists. Such a drop would take it to levels unseen since 1985. For State Street Bank and Union Bancaire Privee, it’s not yet time to make a bet on a pound recovery but further declines into the Oct. 31 Brexit deadline could add to its appeal. Strategists at both institutions point to $1.17 as a level that looks attractive to enter long positions, although that would depend on their verdict on the extent of the bad news behind the drop. Coutts & Co. is already long sterling assets. “It’s been an incredibly popular trade to sell sterling — at a certain point, if everybody sold sterling, who else is there left to sell?” Monique Wong, a senior portfolio manager at Coutts & Co., said in an interview with Bloomberg Television’s Matt Miller earlier this week. The pound rallied more than 1% Thursday after French President Emmanuel Macron said he was “confident” that the two sides “could find something intelligent in 30 days” to resolve the Brexit deadlock. The remarks followed similar comments from German Chancellor Angela Merkel Wednesday and prompted some optimism, even as both leaders warned the basis of the Brexit agreement couldn’t be changed.”
China Hits U.S. With Higher Tariffs on Soybeans, Cars, Oil
“China announced plans to impose additional tariffs on $75 billion of American goods including soybeans, automobiles and oil — retaliation for President Donald Trump’s latest planned levies on Chinese imports that sent U.S. stock futures tumbling. Some of the countermeasures will take effect starting Sept. 1, while the rest will come into effect from Dec. 15, according to the announcement from the Ministry of Commerce. This mirrors the timetable the U.S. has laid out for 10% tariffs on nearly $300 billion of Chinese shipments. An extra 5% tariff will be put on American soybeans and crude-oil imports starting next month. The resumption of a suspended extra 25% duty on U.S. cars will resume Dec. 15. The news from Beijing rekindled concerns about the world’s two largest economies and a global growth outlook that’s already looking shaky. U.S. stock futures dropped along with Treasury yields and oil prices. Emerging-market and commodity-related currencies also declined, while havens such as the yen and gold were supported. In Washington, the initial reaction from the White House was aimed at easing concerns about the fallout. “The amount of money being tariffed is not material in terms of macro growth,” Trump adviser Peter Navarro said on Fox Business Network. The retaliation will “absolutely not” slow growth, he said. China’s announcement comes as leaders from the Group of Seven nations prepare to meet in France and central bankers gather in Jackson Hole, Wyoming, to discuss issues such as the global slowdown. The Chinese announcement was foreshadowed by a tweet from Hu Xijin, the editor-in-chief of the Global Times, a newspaper controlled by the ruling Communist Party.”
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