The headline above is the alluring conclusion from a report at the end of April by S&P Dow Jones looking at equity markets and current very low levels of volatility. In April, the index firm concluded that using their family of indices “large-cap stocks in the U.S., Europe, and Japan, and across our Emerging Market indices, displayed moderately high dispersion and near-record low volatility and correlations. Every reported index volatility was below average; correlations were below the 5th percentile in a majority.” The dashboard below gives what I think is a nice snapshot of key market metrics such as dispersion (growing), correlations (declining) and volatility (near record lows).
We’re back to the Goldilocks market, again.
And just in case you thought that these numbers suggest market calm only apply to equities, take a look at the chart below quoted on Bloomberg but from JPMorgan – it shows the banks global FX vol index.
Given this benign outlook, it is no surprise that some speculators are starting to take some outsized market positions. FTfm, for instance, quoted a certain Mark Spitznagel who says his Miami-based fund, Universa Investments — a “black swan” fund designed to profit from market turbulence — “is happy to scoop up increasingly cheap insurance against financial storms”.
This echo’s market data for equity volatility related products which shows that at the end of April there had been inflows of $2.7bn YTD to long vol products whilst at the same time net short positioning in VIX futures contracts had also hit a recent high. According to analysts at Deutsche “the inverse relationship between positioning in the VIX futures market and Vol ETPs suggests that demand for long vol exposure from primarily retail investors is being recycled to institutional players, likely Hedge Funds, in the VIX futures market.” Bloomberg reports that “Hedge funds are betting the calm will last, shorting the Cboe Volatility Index, or VIX, at rates not seen in at least 15 years. Large speculators, mostly hedge funds, were net short about 178,000 VIX futures contracts on April 23, the largest such position on record, weekly CFTC data that dates back to 2004 show.”
Société Générale estimates that the shape of the Vix curve means that investors are currently pocketing a monthly 8 percent yield by shorting the index.
Overall, personally, I’d be careful about taking too many chunky bets on the likely direction of the S&P 500, though my default presumption is that the global equity markets will make positive gains in the next few months – so I’d echo that net short on the Vix position. One tailwind behind equity investors is the US share buyback engine. I have my own severe doubts about the rationality of this massive share buyback bonanza but its increasingly likely that announced buybacks may start sharply increasing again in the next few months. Digging around inside the latest Deutsche reports I found this two stand out charts – the first showing the volatile upward trend in buybacks, the second by industry, with tech businesses very much in the lead.