Overnight world equity index futures have recovered from a serious dip upon Sarkozy’s concession speech. Argument goes that all of this risk has already been priced in. Greeks have no parliament and are expected to have some sort of tough leadership for the next bailout payments due in June. I guess we might see Merkel and Hollande appear unified on Greece while he keeps up the charade that he’s going to piss Euros on to the banlieu fire that his country has become. I suspect that the success of the Greeks to vote in a Greek fashion will grease their exit from Europe and their return to pre-history.
I can’t fathom that we’ll see the DJ30 close over 13000 today. I’m also surprised about the strength of negative momentum against gold–I would have expected to see it open on the up side this morning with a half as commensurate downside on oil. Hopefully my VIX funny paper appreciates a bit today; see the interesting Bloomberg article on this topic below;
Wire: BLOOMBERG News (BN) Date: May 7 2012 3:24:00
VIX Lowest to CDS Since ’09 as Stock Hedges Trail Bonds: Options
By Cecile Vannucci and Nikolaj Gammeltoft
May 7 (Bloomberg) — Risk perceptions among U.S. equity and
credit investors are diverging the most since 2009 as signs of
an economic slowdown spur bigger increases in prices to protect
against losses in bonds than stocks.
The VIX, the benchmark gauge of U.S. equity derivatives
that usually rises when shares fall, closed last week at 0.032
times the level of the Markit CDX North America High Yield
Index, which increases when confidence in debt issuers
deteriorates, according to data compiled by Bloomberg. That’s
near the 2 1/2-year low of 0.027 times reached in March.{##34##} While the VIX is 21 percent below its one-year average
after sinking 58 percent since October, the gauge of credit-
default swaps is only 2.4 percent less than the mean. Worsening
economic data and concern Europe’s debt crisis is intensifying
may make stockholders more inclined to hedge their gains,
according to Belmont Capital Group’s Stephen Solaka.
“This could signal we have seen lows in the VIX.” Solaka,
who oversees about $50 million including options as co-founder
of Belmont Capital in Los Angeles, wrote in a May 4 e-mail.
“After the rally we have had, I would also expect investors are
looking to hedge gains in indexes, which would keep volatility
bid.”
The ratio between the VIX and the Markit index, which
tracks swaps on junk-rated issuers in North America, narrowed
last week as the Standard & Poor’s 500 Index posted a 2.4
percent drop, the biggest weekly slump since December. The gap
increased from 0.029 on May 1, jumping on May 4 after U.S.
employers added fewer jobs than economists forecast in a
Bloomberg survey.
VIX Surges
The VIX increased 17 percent last week, the most since
February, to 19.16. It reached the lowest level since June 2007
on March 26 at 14.26. The Markit gauge rose 3.1 percent to
595.27 basis points last week. Europe’s VStoxx Index, which
measures the cost of Euro Stoxx 50 Index options, climbed 5.7
percent to 31.06 at 9:22 a.m. in Frankfurt today.
The S&P 500 has slipped 3.5 percent from its April 2 high
after economic data weakened. The Citigroup U.S. Economic
Surprise Index, a gauge of how much reports differ from
economists’ estimates, turned negative on April 25 following six
months of positive readings. The Labor Department said last week
that non-farm payrolls increased by 115,000 in April, the
smallest gain in six months and less than the median economist
projection of 160,000.
The benchmark measure for U.S. stocks surged 13 percent in
2012 through April 2 and posted the biggest first-quarter
advance since 1998. U.S. high-yield debt returned 5.2 percent
during the first three months of the year, while investment-
grade securities gained 2.4 percent, according to data compiled
by Bank of America Corp.
Divergence
“The S&P 500 has outperformed in the first part of 2012,
and this has created a divergence between it and other risk
assets,” Andrew Greeley, a senior managing director at
Stamford, Connecticut-based Acorn Derivatives Management Corp.,
which manages more than $500 million in volatility assets, said
in a May 4 interview. “Either other assets stabilize, driving
premiums on credit lower, or the S&P 500 should correct, pushing
the VIX higher.”
The euro fell today after Nicolas Sarkozy, the French
president who partnered with German Chancellor Angela Merkel to
promote European austerity, was defeated by Socialist Francois
Hollande yesterday. At the same time, Merkel’s party had its
worst result in more than half a century in the northern German
state of Schleswig-Holstein.
In Greece, an exit poll showed voters flocked to anti-
bailout parties, throwing doubt on whether the two main parties,
New Democracy and Pasok, can form a coalition to implement
spending cuts.
Too Pessimistic
Investors are too pessimistic about the outlook for
equities, making it likely that sellers have already dumped
shares and leaving stocks poised to rally, Northern Trust
Corp.’s James McDonald said. The last time the VIX was this low
in relation to high-yield CDS spreads, the S&P 500 was in the
fourth month of a bull market that’s now lasted more than three
years.
Equity mutual funds tracked by the Investment Company
Institute recorded $16 billion of outflows with less than a week
to go last month, on pace for the worst April since at least
1984. More than 34 percent of forecasters surveyed by Investors
Intelligence said stocks will fall 10 percent, the highest
proportion at this time of year since Bloomberg began tracking
the data in 1989.
‘Already Positioned’
“Sentiment around the world now is fairly negative,”
McDonald, chief investment strategist at Northern Trust in
Chicago, said in a telephone interview on May 2. His firm
manages $716.5 billion. “The negative sentiment is a positive
for the markets because it means that people have already
positioned for bad news.”
When stock volatility is low relative to high-yield
spreads, investors may want to protect their holdings by buying
equity market volatility using options, according to Peter
Cecchini, global head of institutional equity derivatives at New
York-based Cantor Fitzgerald LP.
“Credit tends to lead equities through the cycle,”
Cecchini said in a May 3 telephone interview. “The failure of
high-yield spreads to pull back to recent lows, while equity
volatility has pulled back to recent lows, may be indicative of
the fact we’re going to see more equity volatility.”
For Related News and Information:
VIX Versus High Yield CDS Index Graph: G NEWS 4215
S&P 500 Skew Graph: G NEWS 3979
S&P 500 Options Monitor: SPX OMON
World Volatility Indexes: WVI
Options Market Analysis: NI OMA
Options on Bloomberg First Word: NI OPTIONS BFW
–With assistance from Lu Wang and Shannon D. Harrington in New
York and Michael Patterson in London. Editors: Chris Nagi, Nick
Baker
To contact the reporters on this story:
Cecile Vannucci in Amsterdam at +31-20-589-8504 or
cvannucci1@bloomberg.net;
Nikolaj Gammeltoft in New York at +1-212-617-1061 or
ngammeltoft@bloomberg.net
To contact the editors responsible for this story:
Nick Baker at +1-212-617-5919 or
nbaker7@bloomberg.net;
Andrew Rummer at +44-20-7073-3722 or
arummer@bloomberg.net