Seriously, you cannot keep panic out of stocks forever
Lukewarm market has investors betwixt and between
DEEP-FRIED OR GRILLED? Charlie Morrison, president and chief executive officer of Wingstop Restaurant, touring a giveaway event during the company’s IPO celebration at the Nasdaq Market site in New York on Friday. Shares of Wingstop, a Dallas-based chicken wing restaurant chain, rose nearly 70 per cent in their market debut on Friday, valuing the company at $914 million. —
new york — While the turmoil that rocked bond and currency markets in past weeks has been mostly absent from equities, it won’t be forever, options traders speculate.
They’re building hedges against equity swings to levels not seen in eight months, according to contracts tied to the benchmark gauge for US stock volatility. Judging by the most popular options, many of them are bracing for disturbances in the next six days.
Placidity has ruled American equities for the better part of three years, a period in which the Standard & Poor’s 500 Index has had zero declines of 10 per cent or more. In June, concern about the Federal Reserve, whose policy makers meet next week, has sent Treasury yields to the highest since October and the dollar to levels not seen in two months.
“This is people getting ahead of the Fed, buying equity volatility because it has been low relative to rates and FX volatility,” said Pravit Chintawongvanich, a New York-based derivatives strategist at Macro Risk Advisors. “Equities have been in a very tight range lately and people feel like something has got to give.”
Rates timing
About 3.8 options protecting against a jump in the Chicago Board Options Exchange Volatility Index are held for each contract predicting a decline,
data show. Investors use VIX contracts as a tool to protect stock holdings from losses or to speculate on increases in market stress. The VIX, derived from options costs on the S&P 500, moves in the opposite direction of the equities benchmark about 80 per cent of the time.
Five of the 10 most-owned VIX contracts are calls with strike prices as high as 23 expiring on June 17, the last day of the US central bank’s June meeting. As recently as March, traders were speculating this week’s gathering of Fed policy makers would be occasion for the central bank’s first interest rate increase since 2006.
Odds for a move that soon fell as gross domestic product contracted in the first quarter. As of Thursday, futures give a 55 per cent probability for liftoff in September, up from 52 per cent on June 8, according to data compiled by
In the past week, reports showed employers added 280,000 jobs in May, the most in five months, while retail sales jumped 1.2 per cent. Data released last Tuesday showed a record number of help-wanted signs in April pushed job openings above hires for the first time ever.
“Investors seem to think that the Fed can’t raise rates yet because the economy is too weak,” said Andrew Wilkinson, chief market analyst at Interactive Brokers in Greenwich, Connecticut. “If the Fed goes sooner than the current set of expectations, which I think will be justified, it will create some fallout. I don’t think the equity market will react well.”
American equities’ resiliency amid weakness in fixed-income and global currencies has puzzled investors. While measures of implied volatility on currencies and longer-dated Treasuries have climbed to their highest levels since at least the taper tantrum in 2013 this year, the VIX has hovered within a few points of its 2014 average as the stock market has powered to record highs relatively unfazed. —
bullish
neutral Equities have been in a very tight range lately and people feel like something has got to give