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

CNBC Television
13 May 202403:32

TLDRThe current market volatility is surprisingly low, despite concerns over inflation and upcoming PPI and CPI readings. Mandy Xu from CBOE suggests that the Federal Reserve's calm approach to inflation has contributed to this stability. Investors have adapted to the idea that inflation may be more persistent, and the Fed's non-reaction to this has kept the market steady. The discussion also touches on strategies to handle volatility spikes, such as synthetic dividend creation, and the observation that spikes tend to be short-lived. Xu highlights that while some attribute low volatility to equity market factors, the phenomenon is seen across various asset classes and regions, indicating a broader macroeconomic fundamental at play. The market's shift from fearing a recession to anticipating a soft landing is also noted.

Takeaways

  • 📉 Low Volatility: Market volatility is currently near one-year lows despite concerns over inflation.
  • 📈 CPI Expectations: There is anticipation for the upcoming Consumer Price Index (CPI) report, which could impact market sentiment.
  • 🚀 Fed's Stance: The Federal Reserve (Fed) is not panicked about inflation, which is helping to suppress volatility.
  • 💹 Market Response: If the Fed remains calm, the market tends not to panic, as indicated by recent statements from Fed Chair Powell.
  • 💡 Strategies in Place: There are strategies to manage volatility spikes, such as creating synthetic dividends, which are often short-lived.
  • 📈 April Selloff: During the April market pullback, there was elevated option activity in the VIX Index Options, indicating positioning for a volatility spike.
  • 📚 Historical Comparison: More VIX options were traded during the April spike than during the peak of the 2020 pandemic when the VIX reached 90.
  • 🤔 Structural Debate: There is debate over whether equity market structures, such as the proliferation of volatility selling strategies, are suppressing volatility.
  • 🌍 Global Perspective: Low volatility is observed across different asset classes and regions, suggesting a broader macro fundamental at play.
  • 🛤️ Path to Recovery: The market has shifted from fearing a recession to being on a path towards a soft landing.
  • 🔍 Further Analysis: The discussion suggests that further analysis is needed to understand the full implications of current market dynamics and Fed policy.

Q & A

  • What is the current state of volatility in the market according to Mandy Xu?

    -Volatility is currently low, not just for equities as seen in the VIX, but across asset classes including the bond market, credit, and currency, all of which are near one-year lows.

  • Why does Mandy Xu believe that volatility is low despite concerns over inflation?

    -Mandy Xu suggests that the market has come to terms with the fact that inflation is going to be stickier for longer and that the Federal Reserve is not panicked about it. This lack of panic from the Fed helps to suppress volatility.

  • What does Mandy Xu think about the strategies in place to handle volatility spikes?

    -Mandy Xu mentions that there are strategies to handle volatility spikes, such as creating a synthetic dividend. These strategies can be effective as volatility spikes tend to be short-lived.

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

    -During the April selloff, when the VIX spiked to 19, there was very elevated option activity in the VIX index options, indicating that many people were positioning for a volatility spike and monetizing it.

  • What was the volume of VIX options traded during the April spike compared to the peak during the pandemic?

    -More VIX options were traded on the day of the April spike when the VIX hit 19 than at any point in March 2020, even when the VIX spiked to 90 during the pandemic.

  • What is the debate regarding the structural factors in the VIX?

    -The debate is whether there is something structural in the equity market that is suppressing volatility. One common reason brought up is the proliferation of volatility selling strategies, but Mandy Xu's view is that they are not the main reason for the low volatility.

  • Why does Mandy Xu believe that volatility selling strategies are not the main reason for the low volatility?

    -Mandy Xu points out that low volatility is being observed across various asset classes and regions, including credit, FX, rates, emerging markets, and developed markets outside of the U.S., where these strategies are not as common, indicating that the low volatility is likely a macro fundamental issue.

  • What has changed in the market's perception regarding the economy?

    -The market has shifted from fearing a recession to being firmly on the path to a soft landing, according to Mandy Xu.

  • What does Mandy Xu imply about the Federal Reserve's stance on interest rates?

    -Mandy Xu implies that the Federal Reserve is not in a hurry to raise rates and is more inclined to either keep rates unchanged or cut them, which contributes to the suppression of volatility.

  • How does the market's reaction to the Fed's stance affect volatility?

    -If the market panics when the Fed panics, volatility would likely increase. However, the current stance of the Fed, as indicated by Powell, is not concerned, which helps to keep volatility low.

  • What is the general sentiment in the market ahead of the CPI report?

    -According to the title, there is 'Very little fear' in the market ahead of the CPI report, suggesting a sense of complacency or confidence in the market's current state.

  • What is the relationship between the VIX and market volatility?

    -The VIX, or the Volatility Index, is a measure of expected stock market volatility. A low VIX indicates that the market expects low volatility, while a high VIX suggests that the market anticipates higher volatility.

Outlines

00:00

📉 Low Volatility Despite Inflation Worries

The video discusses the current state of market volatility, which is surprisingly low despite concerns over inflation. The upcoming Producer Price Index (PPI) and Consumer Price Index (CPI) readings are expected to provide new insights. Mandy Zu, a market analyst, explains that the low volatility is not only observed in equities but also across various asset classes, including the bond market, credit, and currency markets. She attributes this to the market's acceptance of inflation as a persistent issue and the Federal Reserve's (Fed) non-alarming stance. The Fed's Chairman, Powell, has indicated that there is no rush to raise interest rates, which helps to keep volatility suppressed. Additionally, strategies are in place to manage volatility spikes, such as creating synthetic dividends, which can be monetized quickly before the short-lived volatility spikes subside.

Mindmap

Keywords

💡Volatility

Volatility refers to the degree of variation in a market or a security's value over time. In the context of the video, it is discussed in relation to the current low levels of market fluctuation, which is surprising given the economic uncertainties. The script mentions that volatility is near one-year lows across various asset classes, indicating a general stability despite concerns over inflation.

💡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. The CPI report is significant as it reflects inflation trends. Mandy Xu, the speaker, anticipates the release of the CPI numbers and discusses how market volatility remains subdued ahead of it.

💡PPI (Producer Price Index)

The Producer Price Index measures the average changes in prices received by domestic producers for their output. It is an indicator of how seller prices vary over time. The transcript mentions upcoming readings on PPI, which are important for understanding the potential for future inflation as they reflect costs producers face.

💡VIX

The VIX, or Volatility Index, is a financial metric designed to measure the market's expectation of future volatility. It is often referred to as the 'fear index'. In the video, the VIX is highlighted as being below 14, indicating a lack of fear in the market despite potential triggers for higher volatility.

💡Fed (Federal Reserve)

The Federal Reserve, often referred to as the Fed, is the central banking system of the United States. It plays a critical role in setting monetary policy, including interest rates. The script notes that the Fed's lack of panic regarding inflation has contributed to the current market stability and low volatility.

💡Synthetic Dividend

A synthetic dividend is a financial strategy that involves creating a dividend-like return through the use of options strategies. In the context of the video, it is mentioned as a tool that can be used to manage volatility spikes, suggesting that even if there's a temporary financial loss, the strategy can be monetized to benefit from short-lived volatility.

💡Vol Selling Strategies

Volatility selling strategies involve selling options with the expectation that the underlying asset's volatility will decrease. The video discusses whether such strategies are suppressing market volatility. However, the speaker argues that the low volatility is not solely due to these strategies, as it is observed across various asset classes and regions.

💡Soft Landing

A soft landing in economics refers to a situation where an economy slows down without entering a recession. The script suggests that the market sentiment has shifted from fearing a recession to expecting a soft landing, which contributes to the current low volatility.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The video discusses how the market has come to terms with the fact that inflation might be more persistent than initially thought, which has an impact on investor behavior and market volatility.

💡Macro Fundamental

Macro fundamental refers to the underlying economic, political, and social factors that influence the overall market conditions. The video suggests that the low volatility is a macro fundamental issue, affecting not just equities but also credit, FX, and rates, rather than being confined to a specific asset class or region.

💡Emerging Markets

Emerging markets are nations with social, political, and economic growth that are investing in rapid growth and modernization. The video mentions that the low volatility is observed not just in developed markets but also in emerging markets, indicating a global trend rather than a localized phenomenon.

Highlights

Volatility trading is near the lows of the year despite concerns over inflation.

New readings on PPI and CPI are expected in the next couple of days.

Mandy Xu observes that volatility is low not just for equities but across asset classes.

Inflation is expected to be stickier the longer it persists.

The Federal Reserve is not panicked about inflation, according to Powell.

Volatility is being suppressed due to the Federal Reserve's lack of urgency to raise rates.

Strategies are in place to solve any volatility spike by creating a synthetic dividend.

Volatility spikes tend to be very short-lived.

There was elevated option activity in the VIX index options during the April selloff.

People are positioning for volatility spikes and monetizing them effectively.

In mid-April, there were more VIX options trades than during any point in March 2020.

The debate is whether there is something structural in the equity market suppressing volatility.

Vol selling strategies are not the main reason for low volatility, as it is seen across asset classes and regions.

The market has shifted from fearing a recession to being on the path to a soft landing.

The current low volatility could be a sign of the market's relative complacency with what used to be big news.

The macro fundamental shift from recession fears to a soft landing path might be the cause of the low volatility.

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