Volatility
Realized swings in stocks bear a much closer resemblance to the September 2018 high than January’s, a reminder that some intermediate tops happen with a bang while others fade with more of a whimper. Ten-day volatility for the S&P 500 recently hit its lowest level since 2017. By contrast, the last gasp of January 2018’s advance included a relatively unusual combination of stocks and volatility rising together.
But even though realized gyrations have been smaller, the Cboe Volatility Index, a gauge of the 30-day implied volatility in the S&P 500, is higher now than it was at either of the prior peaks. That’s an indication that market participants may not be overly complacent.
When stocks are at highs, volatility futures curves are usually indicating that near-term market fear is minimal. These three occasions all adhere to that rule of thumb. What differs is the degree of uncertainty about how long the tranquility will last. The upward slope at the front of the VIX futures curve, known to traders as contango, is much steeper now than in January or September 2018, and is poised to remain steep even after an imminent roll of the futures contracts.
The absence of contango almost two years ago was used as a warning sign by some investors that market hiccups could get painful, given the build-up of assets in short-volatility products that would face extra headwinds if the curve flipped, into a state known as backwardation.
Credit
From 30,000 feet, conditions in credit markets are very similar to the January and September local highs, judging by credit default swap spreads on investment and high-yield U.S. bonds. The one glaring difference is how the riskiest debt is doing. Spreads on CCC-rate bonds have failed to pare much of the damage from last year’s selloff, and remain close to 10 percentage points over Treasuries. While the travails of select companies -- mostly located in the energy sector -- have failed to make even a dent in sentiment, it’s a reminder that the rising risk tide isn’t lifting all boats.
This article was provided by Bloomberg News.