JPMorgan's Kolanovic Says Volatility-Sensitive Buyers Are Back
(Bloomberg) -- The semblance of equity market calm after December’s dramatic swings is turning funds that take their cues from volatility into buyers once again.
JPMorgan Chase & Co. quantitative analyst Marko Kolanovic wrote in a note Wednesday with global quantitative and derivatives strategist Bram Kaplan that volatility-linked strategies are adding $1 billion to stocks each day. That amount will increase if market gyrations stay more placid, according to the analysts.
“Bearish sentiment and narrative are currently consensus among investors, and positioning is very low,’’ they wrote. “One should keep in mind that if volatility stays low, inflows may result in the market drifting higher, which could in turn change investor sentiment and the whole market narrative.’’
Enthusiasm for equities remains “subdued’’ with earnings season getting underway, according to JPMorgan. But dealer positioning has changed dramatically since December: They’re now “long gamma’’ -- a state in which their actions are often pushing against the prevailing trends -- which could help further quell volatility and encourage inflows to equities.
Earlier this week, Wells Fargo equity derivatives strategist Pravit Chintawongvanich explained how this behavior can moderate market swings.
“To hedge their long option positions, dealers need to buy when stocks are down and sell when stocks are up (this is called being ‘long gamma’),’’ he wrote on Monday. “In the absence of any customers interested in buying options to offset, that can create an effect where the dealers’ own hedging activity helps to keep the market stable, and hence cause lower realized volatility.’’
The new year has brought with it changes in the biggest risks facing markets, they warn.
“Two key risks that we highlighted in the past (Fed’s monetary policy and trade war) have subsided, but new risks have emerged: U.S. government shutdown and signs of additional slowdown outside the U.S.,” the pair writes.
European, Chinese and emerging-market economic surprise indexes are all mired in negative territory. S&P 500 companies generate about one-third of their revenues overseas, and further softness abroad could end up dimming a domestic growth outlook that’s already fading in part due to the partial shutdown of the U.S. government.
“If the shutdown persists for very much longer, and if we start to see spillover effects into other sectors, downside risks may materialize that force a reconsideration,’’ said Eric Winograd, senior U.S. economist at AllianceBernstein. “The longer the shutdown goes on, the greater the probability of an accelerating negative impact on the economy becomes.’’
Meanwhile, Joe Brusuelas, chief economist with financial consultant RSM US LLP, estimates that if food stamp benefits cease to flow it could shave 0.53 percent off gross domestic product alone.
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