T-1: Election Risk Premium Surges into US Elections

Link to Report: Macro Volatility Digest

WHAT STANDS OUT:

• A disappointing jobs number (nonfarm payrolls +12K vs consensus 100K) and lingering signs of inflation (core PCI +2.7% YoY vs consensus +2.6%) continued to drive the VIXTLT Index to one-year highs. At present, Fed Fund futures are pricing in a 98.5% chance of a 25bps hike at the Thursday’s FOMC meeting.
• Equity vol-of-vol remains high (the VVIX Index = 119) with the VIX® index travelling 4 vol pts over the course of the week. Interestingly, despite the high vol of vol over the course of the week, the current level of the VIX (VIX=22.4, a 18 month high ex: Aug 5) is exactly in line with the pre-established skew. The S&P® Index implied volatility skew for its part remains highly elevated and currently trades at a 99th percentile high.
• With a week left to go till Election Day, Nate Silver currently sees a slight edge for Harris nationwide (within margin of error) but increased momentum for Trump both nationwide and in four battleground states (PA, AZ, NV, and GA.) The Elections Days “kink” (i.e., Nov 6 vs Nov 5 expiry vols) has now widened from 3.75 vol pts last week to 10 vol pts.
• Cboe recently released VIXEQ, the S&P-500 constituent volatility index which tracks the market cap weighted future expected volatility of equities in the Cboe S&P Dispersion Basket Index.

Chart: Elections Day Premium (Nov 6 – Nov 5 ATM SPX Vols) Continues to Widen Heading into US Elections 

^{Source: Cboe, Bloomberg}

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