A key focal point has been the US volatility index (or “VIX index) and for the most part of the session the index held at its lofty highs of 37%. However, as the session wore on the volatility sellers returned and this measure of implied volatility now sits down at 28%, although it is still extremely elevated and it’s no surprise with vols this high that the S&P 500 cash market has traded in a range of 2695 to 2593. Realised volatility sits up at 28%, which is the highest levels since July 2016 and again this a key input annuity funds will use to assess cash levels in portfolios.
However, it’s implied volatility that so many are watching here, and until that settles back below 20% we are going to see these huge intra-day moves. We can look at the options market and see that the implied move (from the current market level of 2640) for the week is still 95 handles in the S&P 500 and 842 points in the Dow Jones.
The multi-year highs in implied volatility is one traders are watching, not just because it is an essential consideration in one’s risk management, but because it is our signal to feel the liquidity dump from systematic funds is abating. “The world is solved, get involved they cry”…while, investors will no doubt be labelled “bargain hunters”. However, it seems we have a nice flush out of much overextended, very frothy markets, some reversion to the mean has materialised and the bulls have fought back. By way of a lead for Asia moves in the S&P 500, Russell 2000 and EEM ETF (MSCI Emerging market ETF) are more inspiring and we are seeing traders pour back into risk positions; it promises to be a strong day for Asia.
Technically, the bulls will be enthused at the sturdy defense of the 200-day moving average on the S&P 500, and whether the index can push back into the 5-day exponential moving at 2716 is of interest as this is trending firmly lower. If the sellers are going to come out to play, then this is the level to potentially initiate shorts. Aussie SPI futures sat at 5784 at 4:10pm AEDT (the close of the ASX 200), and this index now sits up at 5882, 98 points higher (+1.7%), so it’s no surprise to our opening call for the ASX 200 sitting up at 5939 and looking like a very constructive open here, with price also having rallied strongly off the 200-day moving average. Our calls for the Nikkei 225 sit above 22,230 (+2.8%), with the Hang Seng expected to open 3% higher.
Either way, it’s a far better conditions for the likes of CBA and RIO to report earnings. CBA especially needs to fire up a market that could still do with some convincing here. This is where we see the options market (through implied volatility) priced for a very strong in either direction. In the absence of earnings, it's expected that the stock will open 1% or so higher based on the leads alone, so the numbers seen today could not only throw CBA around, but play into moves in the broader financial space. All eyes on margins, costs and capital management, with the market also looking for the payout ratio around 70%, with cash earnings sitting at $5.2 billion or revenue of $13.2 billion. Good numbers and we could see a further squeeze higher from potential opening levels of say $78.19 with price gravitating to fill yesterday’s gap into $79.52.
RIO report after market, with calls for 1H EBITDA of $9.67 billion on revenue of $20.67 billion. The one-day implied move is 3%, so again a big move expected in this stock. We can also see BHP’s ADR suggestive that the miner opens 3.2% higher, which is in line with RIOs implied move. So after the chaos and confusion in the market yesterday the bulls are going to fight back with strong determination this morning.
FX markets have responded to market sentiment and we can see the higher beta NZD and NOK finding good buyers relative to the ’funding’ currencies of JPY and CHF. AUD/USD has certainly come of the earlier lows of $0.7835 and has fairly printed a bullish candle, although we still need to focus on the rates and fixed income markets, where market priced out hikes across the Aussie 30-day bill future curve yesterday and we see the yield premium demanded to hold Aussie 10-year Treasury’s moving to just three basis points over US Treasury’s, although this should widen to around 7 or 8bp when the fixed income markets fully open.