While China may be getting back to work, economic activity is grinding to a halt elsewhere. I take a look at the latest expectations for the US economy. Economists are finally revising down their forecasts with some looking for a technical recession. However, most are looking a V-shape recovery in H2 and barely any increases in unemployment. We’ve been tracking US growth using high frequency alternative data (available to our Pro members) and we more bearish.
We also take a look at whether COVID is helping Trump’s re-election prospects. So far, it doesn’t seem to be helping. I also update our COVID tracker – the US and NZ are seeing the fastest growth in cases in DM, while Turkey is seeing the fastest in EM.
Given the wild moves seen in equity markets, we wanted to dedicate our Deep Dives to volatility and the options market. Derivatives guru Thorsten Wenger tries to work out high equity volatility could theoretically go. Then in his second piece, he delves into whether some of stock market gyrations are due to one of the lesser known “greeks”, Vanna (the sensitivity of delta to changes in volatility).
Finally, we’ll be launching the Macro Hive podcast later this week. I’ll talk markets, review our analysis and have a guest speaker. Watch this space.
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(total reading time: 3 mins)
While China may be getting back to work, economic activity is grinding to a halt elsewhere. I take a look at the latest expectations for the US economy. Economists are finally revising down their forecasts with some looking for a technical recession. However, most are looking a V-shape recovery in H2 and barely any increases in unemployment. We’ve been tracking US growth using high frequency alternative data (available to our Pro members) and we more bearish.
We also take a look at whether COVID is helping Trump’s re-election prospects. So far, it doesn’t seem to be helping. I also update our COVID tracker – the US and NZ are seeing the fastest growth in cases in DM, while Turkey is seeing the fastest in EM.
Given the wild moves seen in equity markets, we wanted to dedicate our Deep Dives to volatility and the options market. Derivatives guru Thorsten Wenger tries to work out high equity volatility could theoretically go. Then in his second piece, he delves into whether some of stock market gyrations are due to one of the lesser known “greeks”, Vanna (the sensitivity of delta to changes in volatility).
Finally, we’ll be launching the Macro Hive podcast later this week. I’ll talk markets, review our analysis and have a guest speaker. Watch this space.
Enjoy!
Bilal
How Bearish Are Investors On US Growth? (1 min read) Recent yield curve steepening has actually reduced the odds of a recession to 12%. This Fed model could well reflect a longer-term view that we will see a sharp recovery later this year. Remember, the curve inverted last year many quarters before today’s recession.
This idea of a V-shaped recovery is confirmed by the consensus of economists. They assign a 40% chance of a recession and their base case is for zero growth in Q2 before we see recovery in H2.
(Bilal Hafeez │ 18th March, 2020)
• Prediction markets still show a big drop in the odds of Trump winning the Presidential elections. Polling also confirms the decline in support. It seems the COVID pandemic is not helping him, yet.
• That said, the odds seem to be around 50:50, so it is not clear that the Democrats will easily win.
• Biden’s wins in yesterday’s primaries (Florida, Illinois and Arizona) confirm his clear front-runner status for the Democratic nomination.
(Bilal Hafeez │ 18th March, 2020)
• We’ve had a lot of great feedback on our new COVID tracker. One suggestion was for us to look at daily changes in cases rather than weekly, so I’ve made that amendment.
• On that score, in the developed world, we find that NZ and the US have seen the biggest jump in daily cases (50% and 39%, respectively). For the US, that means, we have 6,500 cases, which is still lower than our projection for 15,000 cases for a best-case scenario, and way lower than the 170,000 worst case scenario.
(Bilal Hafeez │ 18th March, 2020)
Peak Volatility – How Hot Can It Get? (11 min read) Is there a concept to approach ‘Peak Volatility’? And if not, why not? No, I am not mixing my words up over recent, let’s politely call it erratic, market behaviour. To get an idea of what kind of truck could hit you might just help you to survive. Selling volatility to pocket the carry has been a very lucrative trade for many players for many years until it wasn’t (isn’t) anymore.
In subdued, ‘normal’ markets, annual returns between 30% and 50% are by no means uncommon and can be achieved by shorting the front month futures, rolling them into the next expiration when the time comes – and all that while sipping tea until the time arrives for ritual self-disembowelment. Were it not for the occasional (but inevitable) unpleasant surprises, this strategy could keep a hungry hedge fund manager fed quite nicely. So, the question I have been encountering, unsurprisingly, over recent days goes like this: how high can volatility go?
(Thorsten Wegener │ 18th March, 2020)
Vanna Rally, Vanna Crash – Now You’re Just Making Stuff Up, Right?! (6 min read) My wife is an ardent fan of the Macro Hive WhatsApp group. It’s got some very bright minds exchanging ideas and analysing the daily happenings in the marvellous world of high finance and petty viruses. The other day she was following a thread discussing the almost-miraculous day end rally after the currently en vogue 1000-point downside gaps…
Of course, possible explanations are plentiful: the rather mundane usual end of day short covering, the frantic reaction to the latest comments of some central baker, and even the manifestation of hopeful revaluation of first movers and the associated end of the correction. That was when a man of my liking, a derivatives trader, dropped the V-word, leaving a super-smart investor scratching her head. His question to the chatroom was whether the rally in the last hour of trading might have been a Vanna Rally. And it caused a spirited discussion among those in the know.
At this point the phone was handed to me with instructions to read the thread, and then came a request: explain! I did, and my wife’s response has become the title of this article.
(Thorsten Wegener │ 18th March, 2020)
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)