Below we provide key conclusions from our derivatives-centric models and screens. We publish key conclusions ~monthly in cohesion with shifting trends. The point is to hash out observed consensus views with our own to 1) Find asymmetric pressure points and 2) Generate alternative ways to play our macro themes. Because many of these factors shift in the short-term, this note is intended to be a summary of process.
We’re not going to try and boil the ocean this month on all the ways volatility expectations look much different than they did last month. We have a slide deck (CLICK HERE) that covers 3 topics that will hopefully tell a longer term picture to contextualize how October’s volatility fits in with history more broadly while also unpacking the wide performance divergences through a volatility lens.
Here are those three topics, each with a section in the deck above. One key visual relating to each topic is also included below:
1) U.S. Equity Volatility in Q4 2018: Global Context
This section shows visually that although U.S. financial asset prices were on the right side of our global divergences theme heading into 2018, volatility has been so violent to start Q4 that many U.S. equity markets have among the highest hedging costs on a go-forward basis.
2) Sector & Style Factor Trends
Through a volatility lens we can see that the biggest surprises and divergent volatility trends are concentrated in “growth” and “Momentum”. With that being said, we argue that some of the worst pain has been driven by the race to take down volatility & beta exposure which can include exiting some constructions of other factors too like “value”. We originally outlined this risk in our Q4 themes deck on September 27th, and this morning we provide an update on factor internals and ensuing sector implications. Please reach out with questions.
3) Macro Consensus in Derivatives Markets (Futures & Options Positioning)
Russell 2000 non-commercial futures & options interest continues to move SHORTER on the margin as investors are forced to chase hedges in a pure-play on domestic growth. The R2K Index peak at the end of August came behind the tightest volatility trends in global Macro, setting the stage for the surprise we now see in volatility and positioning.
