Eerie Calm Shrouds MarketsShare on Facebook Tweet on Twitter
Posted by marctomarket.com
on Thursday, 11 May 2017 09:29
The VIX, the volatility of the S&P 500, is sometimes touted as a "fear index." Today is it extending its push below 10%, to fall to its lowest in nearly a quarter of a century.
There has been four (Finland, Austria, the Netherlands, and France) successive European election that did not produce a victory for the euro-skeptics, who want to leave either the EU or EMU or both. In Germany, the AfD has imploded and may be lucky to be represented in the Bundestag after the national elections in September. A few months ago, some were talking about the possibility that Merkel is defeated in her bid for a fourth term as Chancellor. Merkel and the CDU have done well in the state elections, and will likely do well in this weekend's contest in NRW, the most populous German state.
Three-month implied volatility in the euro, a common benchmark has broken below 7% to trade at its lowest level since late 2014. The low since at least 1999 was set in 2014 near 4.75% and besides briefly in 2007, it has not traded below 5%. The fact that volatility has come off suggests participants are less worried about macro-events and in terms of the spot are anticipating range trading.
The risk-reversal (skew in the pricing of puts and calls equidistant from the money, in this case, 25 delta) has steadily moved to reduce the premium that is paid for euro puts. In February, the premium for (three months) puts over calls swelled to more than 3%. This was the most in five years. The premium fell and today stands near 0.25%. Calls were briefly at a premium last February for the first time since 2009.