Stock Market Nerves Remain High, Volatility Futures Curve Shows
(Bloomberg) -- Despite this year’s fall in equity volatility, the futures market indicates traders don’t believe the calm will last, according to Commerzbank AG.
Volatility futures in both the U.S. and Europe remain above their historical averages in shorter-term contracts, strategists Alexander Kraemer and Matthias Bausch wrote in a note Monday. This has resulted in a flatter than normal curve and is a sign investors expect moderately higher swings.
“Short-term futures currently trade above, and longer-term futures significantly below the levels normal for the current level of volatility,’’ the strategists wrote. This suggests “markets do not believe in the current low levels of volatility to persist.’’
In addition, implied volatility skews -- the difference between bullish and bearish volatility bets -- look far too low, in particular for the euro area, they said.
Equity volatility in both the U.S. and Europe has slumped since the end of last year, as a dovish turn from many of the world’s central banks and growing optimism about U.S.-China trade talks boosted risk assets. The Cboe Volatility Index’s reading has more than halved since Christmas Eve, from 36 to just below 15 on Friday, in line with its five-year average.
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