It's Too Quiet When It Comes to Volatility for Some Analysts

(Bloomberg) -- The rally thundering across markets has done more than just drive up prices, it’s pushed down volatility.

Markets around the world have started the year on a tear encouraged by easing trade tensions, a more dovish-sounding Federal Reserve and signs that China is bolstering its economy. And volatility gauges have responded. The CBOE Volatility Index touched its lowest level in four months last week, while the Merrill Option Volatility Index, which monitors Treasury options, is near a four-month low. The JPMorgan Global FX Volatility Index ended Tuesday at the lowest reading since April.

“Volatility instruments have all but completely normalized,” Richard Franulovich, head of FX strategy at Westpac Banking Corp., wrote in a report Tuesday, noting that relative levels of equity, bond, currency and high-yield credit volatility all declined significantly from late last year.

It's Too Quiet When It Comes to Volatility for Some Analysts

“It’s not too often that we see such coordinated levels of comfort. Usually when one market is calm, another is undergoing upheaval. There’s usually at least one outlier, unlike now when there really aren’t any,” Jason Goepfert, the founder of Sundial Capital Research Inc., said. “It has usually been good for bonds, less so for the dollar.”

According to Goepfert’s analysis, when “volatility in everything” drops below 10 percent, 10-year Treasury futures are generally positive up to a year out while the VIX and crude oil tend to rise one month and two months out. The dollar may weaken one to two months afterward.

Cantor Fitzgerald’s Chief Market Strategist Peter Cecchini, who is among the most bearish on the S&P 500 with a 2,390 price target, said in a note Monday that he’s watching for VIX front-month futures to drop below 15 to “confirm an overtly bearish view” on the benchmark gauge. March futures aren’t far off that level at 15.9.

Meanwhile, BTIG strategist Julian Emanuel sees depressed volatility as an opportunity. He recommends using options to maintain upside exposure to further potential gains in U.S. stocks without as much downside as an outright long position.

“Owning exposure through options makes a ton of sense to us” given how cheap they currently are, he said.

©2019 Bloomberg L.P.