Wednesday, 20 May 2015

Volatility continues to contract as volumes dissapate

Equities continue their grind higher as volume wains. As I write the ES has not even traded 500k contracts which is well below the years average, but low volume generally means sideways grind to slightly higher. The lack of volume is shown in volatility products as they continue to decline despite the worst macro month for the US in April since 2011. As always the name of the game is super low rates, and due to the poor data any near term rate hike is off the table.
Given that it has been 7 years since the credit crunch and still economies not firing on all cylinders, it is totally possible that we could have Japan style monetary policy, who haven't raised rates since 1989! This is certainly true in Europe as growth remains sluggish and due to the make up of the union it is unlikely Germany's strength will be a reason for a rate hike.
Whilst equities continue to grind to the upside action in the Bond markets have been alot more volatile with the Bund dropping 800 points in the space of two weeks before recovering at around the 154 level. The fall from 160 to 151 was one of the biggest drops in such a time period that I have seen, although with 10 Year Bund yields at around 0.1% at the high left little room for further downside. So the pullback was inevitable but the speed of the pullback was one which surprised many. This is often what happens when you have such a one directional market and the unwind happens.

On the equity front, net outflows has been at some of the highest levels since 2008 and yet we continue to go up. Thus if this money returns back to the market we could continue to see more upside. Although there is many reasons why this market should go down, the low rate environment and QE continue to hold it up, and so it seems this is the way it will continue .This in turn will continue to crush volatility, with UVXY and VXX at losing more then 50% off their value in the past month. Premium in options are very low, with Facebook for example having an IV rank of 0%. With such low IVs everywhere its hard to find much opportunity, and hence being very selective is the only play right now.

Short Sterling spreads nudge higher on hawkish Fed; Walmart blowout

As most must know trading Short Sterling is a bit of a bore, and has been for a while. Having managed to get out of my 2 month hold before,...