As soft-landing calls engulf Wall Street, traders are betting that a market calm will endure across investing strategies — despite the latest selloff in US stocks and bonds.
Even as Treasury yields rise on rekindled speculation the Federal Reserve isn’t done raising interest rates, closely watched gauges of volatility across markets are hovering near multi-month lows.
One example: On Wednesday, as the S&P 500 fell 0.7%, the CBOE Volatility Index, which measures expected equity-market swings, ticked up by less than half a point. It remains near the post-pandemic trough hit in June. To Matthew Tym, head of equity derivatives trading at Cantor Fitzgerald, that means “the volatility market does not believe that this selloff will continue.”
The forces supporting those bets on calmer markets are the same ones behind the increasingly sanguine economic outlook. The risk of a recession appears to be fading, inflation is easing, corporate earnings are holding up and the Fed is nearing the end of its most aggressive monetary policy tightening in decades — even if there’s one more move in November.
All of that raises the odds that price swings across assets will stay muted, despite September’s track record of being one of the worst months for the US stock market.
“For us to see a storm, we need to see clouds,” said Hamilton Reiner, head of US equity derivatives at JPMorgan Asset Management. “And right now the earnings picture is okay, the employment picture is okay, individuals are still spending money and the Fed has done most of their job.”
Stocks Remain Orderly
A better-than-expected earnings season has helped keep equity volatility relatively low over the last several months. Although it has climbed in the last three sessions, the CBOE index, known as the VIX, is still near its lowest since before the pandemic hit the US in early 2020.
That level may signal further equity gains. During every August when the VIX has dropped below 14 — as it did late last month — the S&P 500 rallied over 80% of the time over the coming one- and six-month periods, according to Dean Christians of SentimentTrader, who cited data going back to 1992.
Subdued stock swings have meant that traders betting on big moves during days with key macroeconomic events have been burned. Owning a 1-day “straddle” on the SPDR S&P 500 ETF Trust, which tracks the benchmark stock index, has now been a losing trade through five straight macro events since July and through eight of the last nine, according to Christopher Jacobson of Susquehana International Group.
Rates Pause
Interest-rate volatility has also slumped as the debate becomes whether the Fed is done tightening policy or will do so one last time in November. The Bank of America Move Index, a gauge of expected Treasury market volatility, is near its lowest level since February.
Even if bond yields do drift up, the impact will be far more subdued than last year, when the Fed started tightening policy with unusual speed, driving its benchmark rate from near zero to its current band of 5.25-5.5%.
“There’s a discussion about like, ‘oh, maybe we get a hike in September, but probably not. Maybe we get a hike in November,’” said Michael Purves, the chief executive officer of Tallbacken Capital Advisors. “But these are tweaks. Last year was massive strategic shifts in Fed policy.”
FX Action Subdues
Currency volatility has also retreated.
The JPMorgan G7 Volatility Index, a gauge of expected foreign exchange swings over the next three months, fell to its lowest level since June on Monday.
Some of the diminished volatility can be attributed to officials in China and Japan who are looking to corral speculators and maintain a tight grip on currency movements. A custom index measuring changes in the Bloomberg Asian Dollar Index over the past month is 4.54%, the lowest since May.
Outside of Asia, the currency markets have been largely adrift as investors park cash in high-yielding deposits and await fresh policy signals from central bankers, further depressing currency swings.
But even if a new trend takes hold in foreign exchange markets, few are expecting large shifts. The price to bet on a tail-risk move in the Bloomberg dollar index is at its lowest since January 2022, a sign that investors aren’t positioning for such stark reversals.
Spreading Out
The calm is also evident in both oil and gold, with measures of volatility in the two commodities hovering near this year’s lows.
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