‘Very little fear' in market ahead of CPI report, CBOE’S Mandy Xu finds

The discussion revolves around the current low volatility in the market despite concerns over inflation. Mandy Xu from CBOE explains that this is due to the market's acceptance of the fact that inflation will be more persistent and the Federal Reserve's non-alarming stance on it. She notes that the Fed's calm approach helps to suppress volatility. Xu also highlights that strategies are in place to manage volatility spikes, such as creating synthetic dividends, which are often short-lived. She points out that during the April sell-off, there was elevated option activity in VIX index options, indicating that many investors were positioning for a volatility spike. However, these spikes are typically brief, and the current low volatility across asset classes suggests a macro fundamental shift from fearing a recession to being on the path to a soft landing.

Takeaways

• 📉 Volatility is currently near one-year lows across various asset classes, including equities, bonds, credit, and currency markets.
• 🤔 The market seems complacent about inflation, possibly due to the Federal Reserve's (Fed's) non-alarming stance on the issue.
• 📈 Despite concerns over inflation, the market does not appear panicked, as indicated by the Fed's Chairman, Jerome Powell.
• 💡 Volatility spikes are being managed through strategies such as synthetic dividends, which are short-lived and quickly sold off.
• 📈 In April, during a modest market pull-back, there was elevated option activity in the VIX index options, indicating positioning for a volatility spike.
• 📚 The VIX spiked to 19 in mid-April, which saw more options trade on that day than during any point in March 2020, when the VIX spiked to 90.
• 🤷‍♀️ Mandy Xu suggests that the low volatility is not just due to equity market factors but is a macro fundamental across regions and asset classes.
• 🌐 The global market has shifted from fearing a recession to being on a path towards a soft landing.
• 🚫 Vol selling strategies are not considered the main reason for the low volatility, as the phenomenon is observed in markets where these strategies are less common.
• 📊 The current low volatility could be attributed to the market's acceptance of a more persistent inflationary environment.
• 🔍 There is an ongoing debate about whether there is a structural factor in the equity market that is suppressing volatility.

Q & A

Why is market volatility currently low despite concerns over inflation?

Volatility is low because the market has come to terms with the fact that inflation is going to be stickier for longer, and the Federal Reserve is not panicked about it. The market tends to panic when the Fed panics, but Fed Chairman Powell has indicated that he is not concerned and is not in a hurry to raise rates.

What does Mandy Xu mean by 'synthetic dividend' in the context of volatility spikes?

A synthetic dividend refers to a strategy where investors can monetize a volatility spike by selling options. Even if they are out of money for a short period, the volatility events are short-lived, and they can take advantage of the spike and then recover.

How did the market react to the April selloff and the spike in the VIX to 19?

During the April selloff, there was very elevated option activity in the VIX index options, with more VIX options traded on that day than any point in March 2020 during the pandemic when the VIX spiked to 90. This indicates that many people were positioning for a volatility spike and were able to monetize it effectively.

What is the common debate regarding the structural factors that may be suppressing volatility in the equity market?

The common debate is whether the proliferation of volatility selling strategies is the main reason for the low volatility. However, Mandy Xu argues that these strategies are not the primary cause, as low volatility is observed across various asset classes and regions where such strategies are not as common.

What has been the shift in market sentiment regarding the macroeconomic outlook?

The market has shifted from fearing a recession to being firmly on the path to a soft landing, indicating a more optimistic outlook on the economy's recovery.

Why are bond markets, credit, and currency markets also experiencing low volatility?

The low volatility across these markets suggests that the current market stability is not just limited to equities but is a broader macro fundamental, likely due to a more optimistic economic outlook and confidence in the Federal Reserve's approach to managing inflation.

How does the Federal Reserve's stance on interest rates affect market volatility?

The Federal Reserve's indication that it is not in a hurry to raise rates and may either keep rates unchanged or cut them contributes to suppressing volatility, as it signals a stable and predictable approach to monetary policy.

What role do option trading strategies play in the current market volatility?

Option trading strategies, such as positioning for volatility spikes and monetizing them, play a role in how investors manage risk and opportunity in the market. However, they are not the sole reason for the low volatility observed across different asset classes.

What does Mandy Xu suggest about the relationship between the Fed's actions and market reactions?

Mandy Xu suggests that the market's reaction is closely tied to the Federal Reserve's actions. If the Fed appears calm and not panicked about inflation, it helps to keep market volatility low.

How do investors typically respond to new economic data such as PPI and CPI readings?

Investors closely watch PPI and CPI readings as they provide insights into inflation trends. However, the current low volatility suggests that the market is not overly reactive to these data points, possibly due to the Fed's communicated approach to managing inflation.

What could be an implication of the observed low volatility across different asset classes?

The low volatility across different asset classes could imply a high level of confidence in the current economic conditions and the Federal Reserve's management of monetary policy, leading to a more stable investment environment.

How might the market's complacency with what used to be big news, such as inflation concerns, affect future market behavior?

Market complacency could lead to a lack of preparedness for potential economic shocks. If the market becomes too comfortable and does not adequately price in risks, it could experience more significant corrections or volatility when unexpected events occur.

Outlines

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📉 Low Volatility Despite Inflation Worries

The video discusses the current state of volatility in the market, which is surprisingly low despite concerns over inflation. Mandy Zu, a market analyst, explains that this is due to the Federal Reserve's (Fed) non-alarming stance towards inflation, which is expected to be more persistent. The Fed's Chairman, Powell, has indicated that there is no rush to raise rates, which has a calming effect on the market. Additionally, strategies are in place to handle volatility spikes, such as creating synthetic dividends, which are sold off when volatility increases. Zu also mentions that during the April market sell-off, there was elevated option activity in the VIX index options, indicating that many investors were positioning for a volatility spike and were able to monetize it when it occurred. The discussion suggests that the low volatility is not just a structural feature of the VIX but rather a reflection of the market's relative complacency towards what used to be significant news.

Keywords

Volatility

Volatility refers to the degree of variation in a market or asset's value over time. In the context of the video, it is being discussed in relation to the stock market and how it is currently near one-year lows despite concerns over inflation. The video suggests that the Federal Reserve's (the Fed's) non-reaction to inflation is a factor in keeping volatility suppressed.

CPI (Consumer Price Index)

The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is a key indicator of inflation and is closely watched by investors. The video mentions that the market is anticipating the release of the CPI report.

PPI (Producer Price Index)

The Producer Price Index measures the average changes in prices received by domestic producers for their output. It is another measure of inflation that reflects the price changes before they reach the consumer. The script indicates that new readings on PPI will be released soon, which could impact the market.

VIX

The VIX, or Volatility Index, is a financial metric that measures the market's expectation of future volatility based on the prices of S&P 500 index options. It is often referred to as the 'fear index'. The video discusses the VIX being near one-year lows, indicating a lack of fear in the market.

Fed (Federal Reserve)

The Federal Reserve is the central banking system of the United States and is responsible for implementing monetary policy. The video discusses the Fed's stance on inflation and how its lack of panic is contributing to the low volatility in the market.

Synthetic Dividend

A synthetic dividend is a financial strategy used by investors to generate income from a stock without the company actually paying a traditional cash dividend. The video suggests that strategies like synthetic dividends can be used to manage volatility spikes in the market.

Asset Classes

Asset classes refer to categories of investments that have similar characteristics and are subject to the same laws and regulations. Examples include equities, bonds, and real estate. The video mentions that low volatility is not just observed in equities but across all asset classes.

Credit

In the financial context, credit refers to the ability of a borrower to obtain goods, services, or money without immediate payment by transferring the right to receive payment at a later date. The video discusses how volatility is low in the credit market, which is one of the asset classes.

FX (Foreign Exchange)

FX, or foreign exchange, involves the buying and selling of one currency for another. It is a key part of international trade and finance. The script notes that volatility is low in the FX market, indicating a broader trend across different financial markets.

Rates

In the context of the video, 'rates' likely refers to interest rates set by the Federal Reserve, which influence the cost of borrowing and the potential return on investment. The Fed's decision not to raise rates is mentioned as a factor in the current market stability.

Soft Landing

A soft landing in economics refers to a situation where an economy slows down without falling into a recession. The video suggests that the market's shift from fearing a recession to expecting a soft landing is a macro fundamental factor contributing to the low volatility.

Highlights

Volatility trading is near the lows of the year, even with worries over inflation.

Volatility is low not just for equities, but across asset classes including bond, credit, and currency markets.

The market has come to terms with the fact that inflation is going to be stickier the longer it persists.

The Fed is not panicked about inflation, which helps suppress market volatility.

If the market panics when the Fed panics, but Fed Chair Powell has indicated he is not concerned and not in a hurry to raise rates.

Strategies are in place to solve any volatility spike, such as creating a synthetic dividend.

Volatility spikes tend to be very short-lived, and people take advantage of selling any spike.

During the April selloff, there was elevated option activity in the VIX index options as people positioned for a volatility spike.

In mid-April when the VIX spiked to 19, more VIX options were traded than any point in March 2020 during the pandemic when the VIX spiked to 90.

There is debate over whether something structural in the equity market is suppressing volatility.

The proliferation of volatility selling strategies is not the main reason for low volatility, as it is also low across other asset classes and regions.

The low volatility across asset classes and regions is a sign of a macro fundamental shift in the market.

The market has gone from fearing a recession to now being firmly on the path to a soft landing.

CBOE's Mandy Xu finds there is very little fear in the market ahead of the CPI report.

New readings on PPI and CPI in the next couple of days could impact the market.

Volatility trading has been low as the market is relatively complacent with what used to be big news.