U.S. equity volatility rose the most in almost four months last week after unexpectedly slow growth in China and a selloff in commodities triggered the biggest stock-market drop since November.
The Chicago Board Options Exchange Volatility Index climbed 24% to 14.97, the most since December. The index known as the VIX surged 46% in four days, briefly erasing its year-to-date decline, before sliding 15% on the last day of the week. The Standard & Poor’s 500 Index, which moves in the opposite direction as the VIX about 80% of the time, slid 2.1% to 1,555.25 for the week.
Stock swings are increasing after the largest slump in gold futures in more than three decades, weaker corporate earnings and data from U.S. retail sales to Chinese manufacturing that trailed economists’ forecasts. Shares outstanding in the most popular exchange-traded funds linked to the VIX have reached all-time highs this month as investors seek to hedge losses in stocks.
“Volatility is getting more sticky, it rushes up without going straight back down which we haven’t seen before this year,” Michael Purves, Greenwich, Connecticut-based Weeden & Co.’s head of derivatives research, said in a phone interview on April 19. “The markets are starting to process that the economic news has been getting softer and that we’re due for a correction. We obviously also had the extraordinary move in gold which has been enhancing volatility across asset classes.”
Equity Volatility
The VIX rose 3.2% to 15.45 at 9:49 a.m. in New York today. The S&P 500 has lost 2.4% after reaching an all- time high on April 11. Since 2010, the U.S. equity benchmark has dropped an average 5.2% in the second quarter after rising in the first.
U.S. stock-market volatility has risen this month as investors speculate how much longer the bull market that began in 2009 will continue. The average gain or loss for the S&P 500 doubled to 0.84% from the first quarter and is higher than 2012’s 0.59%, data compiled by Bloomberg show.
Options traders have been increasing bets that volatility would increase. Shares outstanding for the iPath S&P 500 VIX Short-Term Futures ETN climbed to an all-time high of 68.8 million on April 15, data compiled by Bloomberg show. The figure for the ProShares Ultra VIX Short-Term Futures reached a record 54.6 million shares on April 11. The two had the highest volume in the past 30 days among volatility-related securities.
‘Complacent Atmosphere’
“The complacent atmosphere of the equity space is being challenged by the new order of slower growth as seen in the Chinese GDP and concerns that Fed financial engineering is unraveling on some levels,” Greg Richards, who trades VIX and S&P 500 options as an institutional options broker at Chicago- based PTR Inc. on the CBOE floor, wrote in e-mail on April 19.
The Federal Open Market Committee in March reaffirmed plans to buy bonds at the current $85 billion monthly pace until the labor market outlook improves “substantially.” It also pledged to keep interest rates near zero as long as unemployment is above 6.5% and inflation doesn’t exceed 2.5%. Unemployment was 7.6% last month.
The VVIX Index, a measure of VIX swings, jumped 16% last week to 95.52 for its biggest gain since end of 2012. The gauge reached its highest level since July on April 18. That day, the VIX rose as much as 10%, briefly erasing its 2013 loss.
There are more outstanding options betting on volatility gains than losses, with 4.14 million VIX calls versus 1.95 million puts as of April 17, data compiled by Bloomberg show. The ratio of calls-to-puts climbed to 3.08-to-1 on April 9, the highest level since February 2010.
Subdued Swings
Even after last week’s surge, the VIX is still 9% below its average for the past year, data compiled by Bloomberg show. Stock volatility will remain subdued until the Fed pares its stimulus policy, according to Steve Kilcullen of Nomura Holdings Inc. in New York.
“The trading is very defensive, but it has a short focus,” Kilcullen, head of flow derivatives sales for the Americas at Nomura, said in an April 19 phone interview. “Equity volatility won’t go higher until we see policy change or a reduction of policy effectiveness in the U.S.”
The U.S. job-creation engine sputtered in March as payrolls grew by 88,000, the smallest gain in nine months, Labor Department data showed April 5.
China’s Economy
China’s gross domestic product rose 7.7% from a year earlier, the National Bureau of Statistics said on April 15. That compares with the 8% median forecast in a Bloomberg News survey of 41 analysts and 7.9% in the fourth quarter. That day, gold futures fell 9.3% to $1,361.10 an ounce, the biggest drop since March 1980.
Profits at S&P 500 companies probably dropped 1.1% in the first three months of the year, the first year-over-year decrease since 2009, according to forecasts compiled by Bloomberg. U.S. earnings growth slowed last year to a quarterly average of 4.7%, less than one-fifth the rate during 2010 and 2011, data compiled by Bloomberg show.
The S&P 500 rallied 12% in the first quarter of last year and slipped 3.3% in the second. The previous year, the index gained 5.4% in the first three months and lost 0.4% in the second quarter. The 12% slump in the S&P 500 between April 2010 and June 2010 followed a 4.9% increase in the first quarter.
Investor Expectations
“Investors’ growth expectations were pretty low to start with as shown by the poor performance of commodities and China, so the events that lead us here do not seem sufficient to create real panic but post the 2008 trauma, we shouldn’t underestimate what the markets say,” Olivier Sarfati, head of equity trading strategies at Citigroup Inc. in New York, said in a phone interview.
The S&P 500’s 10-day historical volatility, a measure of actual price swings, jumped 86% over the past week to 20.15 on April 19, its highest level since November.
Among the five most-owned VIX contracts, four were wagers that volatility would rise. May 25 calls, with an exercise level 67% above the last close, and May 20 calls had the largest open interest.
“I expect the VIX to be range bound between 12 and 20,” Philippe Trouve, the VIX options trader and director for equity derivatives at Bank of America Corp. in New York, said in an April 19 interview. “It will be volatile within that range because the macro environment is very binary: inflation or deflation, more QE or less QE, so the market is struggling with all these potential outcomes.”
