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Unusual Market Calm: Stocks Ignore Rising Yields and Wars
5 Oct
Summary
- Stock market volatility remains surprisingly low despite global risks.
- Bond market volatility is significantly higher than stock market volatility.
- Unusual asymmetric stock response to Treasury yield changes noted.
Wall Street strategists are increasingly exploring trades across different asset classes as traditional markets like stocks, gold, and oil face challenges while US Treasury yields continue to rise. This strategic shift comes amid surprisingly low market volatility, despite significant global risks including ongoing wars and upcoming elections in various countries.
The S&P 500 has maintained a state of unusual calm, with its implied volatility near five-year lows. This is attributed to individual stocks moving in divergent directions, which suppresses overall index swings. In contrast, the bond market has experienced considerably larger fluctuations.
The gap between stock and bond volatility has widened significantly, reaching a near two-year low in the ratio between the VIX and the ICE BofA MOVE Index. This divergence complicates traditional hedging strategies for equities, as the VIX is not reacting robustly to interest rate movements.
Furthermore, a recent asymmetric relationship between the S&P 500 and Treasury yields has been observed. Stocks have shown a stronger positive reaction to falling yields than a negative reaction to rising yields. This dynamic may offer some underlying support for the stock market, even amidst higher Treasury yields.
Looking ahead, October could see increased volatility due to the election cycle, historically a period where the VIX tends to rise. While low volatility might tempt investors into short-volatility trades, the proximity of US midterm elections introduces significant event risk, making such strategies potentially hazardous.
