Cross-Asset Volatilities Rise on Rate Policy Uncertainty

Link to Report: Macro Volatility Digest

WHAT STANDS OUT:

• Cross-asset volatilities advanced across the board as Boston Fed President S.Collins cautiously reinforced J.Powell’s hesitancy to continue cutting rates in December. Interest rate volatility rose with the VIXTLT climbing 10 vols pts (53rd percentile) to 106 (82nd percentile) and Fed Fund futures are now pricing in a lowered chance of a rate cut on its Dec 18 meeting from 82% to 58%). 
• The VIX® Index underperformed skew last week; rising only 1.2pts to 16.14 (vs an expected +3pts per skew) on the S&P-500® Index’s 2% wk/wk pullback. Vol-of-vol has increased over the last week with the VVIX Index rising 11 pts to 99 and reflects a bid for both up and downside VIX convexity (25 delta VIX calls and 25 delta VIX puts are currently trading at 91st and 87th percentile highs respectively.)
• The post-Election “Trump-Trade” sector rotation (away from REITS and Tech towards Consumer Discretionary, Energy and Financials.) has amplified stock dispersion amidst the heightened demand for single stock optionality during Q3 earnings.  (To date nearly 1/5 of all S&P companies aside from the Mag 7 have reported lower than expected earnings pushing VIXEQ, the avg implied volatility for S&P 500 constituent stocks, +4vols to 36.) The combination of the two effects have driven stock dispersion (DSPX) from pre-Election 35th percentile lows to 85th percentile highs.

Chart: The Post-Election Sector Rotation Amidst Q3 Earnings Has Increased Stock Dispersion to 85^th Percentile Highs

^{Source: Cboe, Bloomberg}

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