Macro Volatility Commentary
Domestic equity market volatility continues to be muted with both implied and realized measures of volatility holding up well despite the drastic pick-up in realized volatility spreading through both Emerging Market (EM) equities and currencies. The U.S. has been rather resilient in the face of growing concern about risk of contagion into Developed Markets (DM), with a meltdown in EM not yet shifting investor psychology into risk-off mode. The slight pick-up in US stock volatility is due more to the rout that continues in tech (Tesla, FAANG) and concern over a worsening of trade tensions with China. As a result, many of the popular metrics within volatility are pointing toward bullish territory for major domestic indices (Russell 2000, Nasdaq, S&P 500) while Emerging market stress continues to permeate through both FX and Equity markets leading to potentially attractive dislocations in volatility.
European equities, on the other hand, have become increasingly sensitive to EM risk, with volatility rising throughout Europe over the past few weeks as the SX5E has experienced its worst decline in almost 6-months. This could represent an apparent shift in focus from domestic issues (like Brexit & Italian risk) to more exogenous factors. We continue to watch volatility in Europe closely to see if there is any potential spill-over effect into Developed Markets on the horizon. Volatility in Asia has also been driven largely by EM risks as well as fears of additional Chinese and/or Japanese tariffs more significantly impacting exports to the US. So it comes as no surprise that realized volatility has been steadily increasing amidst these concerns offering interesting opportunities within implied volatility to isolate dislocations and potentially take advantage of favorable volatility conditions.
Cross-Asset Volatility Monitor
In the latest edition of our 20 factor Cross-Asset Volatility Monitor, many DM equity indices lead the way for most dislocated upside & downside volatility metrics when comparing to recent realized volatility. As a reminder, our proprietary model screens for volatilities that may suggest larger than normal market moves in the left (downside) or right (upside) tails. Those that are near the center have, in our opinion, fairly priced implied volatility compared to the risk you are taking, using the recent (1-month) past as your guidepost. As you move further away from the center, you see the magnitude of dislocation between where current markets are pricing implied volatility as compared to what has actually recently realized. Not surprisingly, most of the FX and EM related factors (EEM, FXE, FXY, FXA) have fairly priced volatility (and for good reason), given the recent risks permeating through the system that have caused a dramatic pick-up in realized volatility and severe drawdowns, as highlighted in our Commentary. Alternatively, some DM benchmark indices like SPX, SMI, AS51 and SX5E are screening as potentially attractive short volatility opportunities given the fact that the downside Volatility Mutual Funds market is pricing in abnormally expensive tails, especially when considering realized volatility has not kept up with the magnitude of change in implieds. We will certainly continue to monitor these markets as a source of abnormally cheap or expensive convexity and to hopefully continue to identify attractive trading opportunities.
Important Disclosures and Definitions: The viewpoints expressed in this report are solely those of Infinity Q Capital Management, LLC, (“Infinity Q”) and can change without notice. This report has been prepared solely for discussion purposes only and does not necessarily purport to be a complete analysis of the topics or presented. It has been based on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the information in the report is accurate or complete. Any views expressed in the report reflect our judgment at this date and are subject to change without notice. Certain information may be based upon or represent forward-looking statements. Statements that are forward-looking involve known and unknown risks and uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Any specific Quantitative Hedge Fund contained or referred to in this report may not be suitable for all investors. Advice we give to clients in particular situations may differ from the views expressed in this report. No investment or other business decisions should be made based solely on the views expressed in this report. This material is intended for information purposes only and does not constitute investment advice or an offer or solicitation to purchase or sell any securities, Infinity Q funds, or any investment strategy, nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. Any such offer or solicitation shall only be made pursuant to and subject to the terms and conditions contained in the Fund’s disclosure documents , which qualifies in its entirety the information set forth herein. The Fund’s disclosure documents should be read carefully prior to making an investment, as they contain additional information about the investment objectives, terms and conditions, tax information and risk disclosures pertaining to the Fund. The indices and securities included in the Cross Asset 1-Month Probably Monitor are the 20 underlyings commonly assessed in reviewing the broad global volatility markets. SPX Index: The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. SX5E Index: The EURO STOXX 50 is a stock index of Eurozone stocks designed by STOXX, an index provider owned by Deutsche Börse Group. According to STOXX, its goal is "to provide a blue-chip representation of Supersector leaders in the Eurozone.” NDX Index: The Nasdaq-100 Index includes 100 of the largest domestic and international non-financial companies listed on The Nasdaq Stock Market based on market capitalization. The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. UKX Index: The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange. DAX Index: The Deutscher Aktienindex (German stock index) is a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange SMI Index: The Swiss Market Index is Switzerland's blue-chip stock market index. It is made up of 20 of the largest and most liquid Swiss Performance Index (SPI) large- and mid-cap stocks. AS51 Index: The S&P/ASX 200 measures the performance of the 200 largest index-eligible stocks listed on the ASX by float-adjusted market capitalization. It is considered the benchmark for Australian equity performance. NKY Index: The Nikkei-225 Stock Average is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. HSI Index: The Hang Seng Index is a freefloat-adjusted market capitalization-weighted stock market index of the largest companies that trade on the Hong Kong Exchange, and is consider the main indicator of the overall market performance in Hong Kong. Kospi2 Index: The KOSPI 200 Index is a capitalization-weighted index of 200 Korean stocks which make up 93% of the total market value of the Korea Stock Exchange. Investment involves risk, including possible loss of principal. The prices of securities fluctuate, sometimes dramatically. The price of a security may move up or down, and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling securities. Past performance is no indication of future results
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