Should we worry as the market’s ‘fear gauge’ nears its highest level since the Great Recession? Wall Street’s Hot Volatility Trade Right Now Is Betting on Calm

Mar 2, 2020

Lead Stories

Should we worry as the market’s ‘fear gauge’ nears its highest level since the Great Recession?
Andrew Van Dam – The Washington Post
An index pundits love to call Wall Street’s “fear gauge” is flashing red. Should we panic?
The long answer is full of nuance and numbers. The short answer? Fasten your seat belts. No matter how this ends, we may be in for some turbulence.

Wall Street’s Hot Volatility Trade Right Now Is Betting on Calm
Yakob Peterseil – Bloomberg
The carnage of the last seven days will have made millions for traders who wagered on panic breaking out in the stock market. Now strategists say there’s money to be made in betting everything cools down.
It’s time to consider shorting volatility on the S&P 500 Index, according to Wells Fargo & Co.’s Pravit Chintawongvanich, who echoes a slew of sell-side voices. Last week’s rout pushed expected swings on the gauge in the near-term to “extreme levels,” so the equity derivatives strategist recommends selling put options on the benchmark to profit from an imminent decline in jitters.

Oil Looks Into Abyss as Virus Threatens Demand Contraction
Javier Blas – Bloomberg
Flights canceled in Europe, schools closed in Japan, towns quarantined in Italy and panic in California. The coronavirus crisis has gone global, and with it, its impact on energy demand.
For only the fourth time in almost 40 years, oil consumption may not grow at all in 2020, according to a growing minority of traders, investors and analysts. For OPEC, gathering in Vienna this week to discuss production policy, it’s a nightmare scenario likely to force the cartel into deep output cuts.

The coronavirus outbreak is the ‘biggest danger’ for the global economy since the financial crisis and could halve growth in 2020, OECD warns
Spriha Srivastava – Markets Insider
The novel coronavirus has the world economy in its most “precarious position” since the 2008 financial crisis, the Organization for Economic Cooperation and Development said Monday in its latest forecast.
“The global economy faces its biggest danger since the financial crisis,” the OECD warned. “Containing the epidemic and protecting people is the priority.”

Cboe Sees Best Monthly Spot FX Volumes Since 2018 in February
Celeste Skinner – Finance Magnates
2020 has so far proven to be a good year for foreign exchange (trading) for Cboe, with its institutional spot FX platform reporting the best monthly trading volume in February of this year since October of 2018.
During the month of February 2020, Cboe achieved a total volume of $825.1 billion – the strongest monthly volume since October of 20

EU ready to loosen purse strings as coronavirus bites economy
Francesco Guarascio – Reuters
The European Union is considering measures to protect its economy against the impact of the coronavirus outbreak, top officials said on Monday, as health risks in Europe were raised to high after the virus spread to most countries in the bloc.

Market Technicians Think the Selloff Isn’t Over
Paul J. Davies and Julie Steinberg – WSJ
After such a bad week for stocks, the question is whether the worst is over. In the view of analysts of more technical corners of the markets, the answer is: probably not yet.
The S&P 500 had its worst week since the financial crisis, down nearly 12%. But some think it might have to drop by more than 20% from its peak before it will find real support from bargain hunters.

This corner of Wall Street is making a mint for JPMorgan and Goldman as the stock market tanks
Hugh Son – CNBC
Equity derivatives desks at JPMorgan Chase and Goldman Sachs have thrived as a furious correction in U.S. stocks took hold in the past six days, according to people with knowledge of the situation. Banks positioned themselves to be long volatility – in other words, to benefit if volatility spiked – by snapping up options contracts ahead of the market rout, according to the people. The VIX, known as the “fear gauge” of Wall Street, rose above 49 on Friday, an alarming jump not seen in two years. At the same time, clients who were previously complacent about market risks clamored for options to protect against further moves, causing a jump in activity for banks.

Exchanges and Clearing

Eurex enables global ESG investing with new MSCI index-based derivatives
Eurex Exchange
Amid the strong worldwide trend towards responsible investing, Eurex is supporting asset managers in switching to sustainable investments by broadening its ESG segment and expanding its range of ESG derivatives to markets beyond Europe. As of today, five new Eurex futures will cover the sustainable versions of key regional and global MSCI benchmarks.
Trading in MSCI index-based derivatives is one of the fastest growing segments at Eurex. The share of client business driven by institutional investors has nearly doubled within the last two years and now represents 27 percent of turnover. Eurex’s MSCI index-based derivatives offering is the broadest worldwide to be tradable on a single platform. 120 MSCI index-based futures and 20 MSCI index-based options are currently listed at Eurex. Total open interest is approximately 2.5 million contracts, which is the world’s highest MSCI index-based derivative-related open interest.

Regulation & Enforcement

FCA sees reports of suspicious transactions drop in 2019
Hayley McDowell – The Trade
The UK’s financial watchdog has reported the first decline in the number of suspicious transactions and order reports (STORs), suggesting firms are taking more responsibility for supervision of trading activity.
According to figures published by the Financial Conduct Authority (FCA), the total number of STORs in 2019 totalled 5,455 across equities, fixed income, foreign exchange and commodities, down 8% from 2018 when 5,926 STORs were reported.


Airlines Have Become the Perfect Anti-Coronavirus Play
Jon Sindreu – WSJ
Think that markets are exaggerating the risk of the coronavirus outbreak triggering a global recession? Airline stocks may be the perfect way to play that contrarian trade.
From the equity markets’ record high on Feb. 19, U.S. and European airline stocks had fallen 21% and 30% respectively by Friday, compared with a 14% drop for both regions’ headline indexes.

****JB: Also see Schaeffer’s Investment Research article, Airliner Puts Pop as COVID-19 Cases Rise.

A Long-Term SPX Trendline to Watch
Todd Salamone – Schaeffer’s Investment Research
As the S&P 500 Index (SPX—2,954.22) approached the 3,335 area in late January — an area five times its 2009 low — I cautioned readers about the growing risk of a long-term choppy period around this level and/or a sharp pullback. The caution was based on a combination of factors, including extremes in optimism based on a sentiment reading we track closely and the historical price action since 2009. Specifically related to the latter clue, in instances when the SPX doubled, tripled and quadrupled the 2009 low, either a sharp pullback immediately occurred or a lengthy consolidation period.


Robinhood Trading App Has Outage Amid Heavy Volume
Avi Salzman – Barron’s
Robinhood, the free trading app that has signed on more than 10 million users, went down on Monday morning, frustrating investors looking to position their portfolios around the recent volatility.
The company told users that it was experiencing a “systemwide outage” that it was working to resolve. “We’re experiencing downtime, and are working to resolve this as quickly as possible,” a Robinhood spokesperson said in a statement.

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