The volatility spike that is hard to forget
STOXX 600 up 0.2%
Swiss stocks underperform
Autos provide lift
Markets await Fed Chair Powell speech
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THE VOLATILITY SPIKE THAT IS HARD TO FORGET
The carnage in markets just a few weeks ago seems like a distant memory, as a summer lull and optimism about potential Fed rate cuts prop up sentiment.
The STOXX 600 .STOXX is up about 7.7% and the S&P 500 .SPX is up almost 9% since August 5, when U.S. jobs data and the unwinding of the yen carry trade triggered a dramatic market sell-off. So have the moves of those days had any lasting impact?
Perhaps one event that will be harder to forget is the spike in volatility. The .VIX hit a more than four-year high of 65.73 points on Aug. 5, before retreating back to previous levels in the last few weeks.
For Bernie Ahkong, CIO Global Multi-Strategy Alpha at UBS O'Connor, the dynamic behind that day's spike means the VIX may be less of a useful indicator for determining how to think about equity markets.
"I do think the magnitude of it was essentially a function of exaggerated risk-adjusting behaviour from systematic, rules-based funds who would have had to do that whether the VIX was at 40 or 50 or 60," said Ahkong.
This technical dynamic lurking in the background means the VIX almost loses a bit of its significance versus history, he said.
August 5th's volatility spike was comparable to rises seen during 2008's global financial crisis, something that fundamentally didn't make sense to Ahkong.
"It's part of the reason why we under-reacted in adjusting our portfolio," he said.
The move higher would usually statistically predict markets would have gone down more.
But if the team at UBS O'Connor had focused on that as their primary indicator on Aug 5., they would have been selling a lot of equity risk, which would have then hurt the following day when markets rebounded.
"That's why I’m a little bit wary of being overly focused on that as one indicator," said Ahkong.
(Lucy Raitano)
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FRIDAY'S OTHER LIVE MARKETS POSTS:
EUROPEAN SHARES INCH UP, SWITZERLAND UNDERPERFORMS CLICK HERE
EUROPEAN FUTURES HOLD THEIR BREATH BEFORE POWELL CLICK HERE
BOJ'S UEDA BOLSTERS YEN. UP NEXT, POWELL CLICK HERE
Japan's core-core inflation dips below 2% https://reut.rs/4cDV24c
Graphic-Stocks on Powell's Jackson Hole speech days https://reut.rs/3AssQE1
European equities mostly higher, Switzerland lags https://reut.rs/3T1CDHT
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