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May 20, 2019

Markets I Some Investors Bet Volatility Is Here to Stay.

The Wall Street Journal.
Markets Bear logo.
We're kicking off a new week. I'm Jessica Menton, breaking down the latest in markets.
Global trade remains in focus as investors watch to see whether the Dow can snap a four-week losing streak. Futures are dropping ahead of the opening bell.
On the earnings front, Home Depot, Target and Foot Locker are among notable retailers opening their books later in the week. 
Meanwhile, markets reporters Ira Iosebashvili and Gunjan Banerji weigh in on why some investors are betting that markets will remain volatile. 

Overnight Developments

  • Global stocks were mostly lower on Monday, as investors continued to weigh the impact of souring U.S.-China trade negotiations.
  • Read our full market wrap here

Trade Concerns Are Boosting Volatility Bets

By Ira Iosebashvili and Gunjan Banerji
As a renewed bout of trade worries roils global stocks, a growing number of investors are betting that markets will stay erratic.
In a sign that investors are shifting how they react to markets, some are abandoning "buy and hold" postures and pouring money into bets that would take the edge off a sharp drop in markets or profit from higher volatility.
Others are trading more frequently to take advantage of increased price swings, backing away from assets that may be vulnerable to turbulence or warning clients about the possibility of big declines in their portfolios.
These types of approaches were largely unpopular during the market’s decade-long bull run. Investors were happy to hang onto shares and tended to avoid strategies that cut into their profits, such as keeping a large cash allocation or maintaining expensive hedges.
Now, many are convinced that an aging bull market, persistent uncertainties over global trade and growth and the increasing dominance of machine trading will lead to more frequent eruptions of volatility. They point to selloffs that gripped markets at the beginning and end of 2018, as well as the swings of recent weeks.
“This is unlike any other time in the markets over the last several years,” said Don Dale, a founder at Equity Risk Control Group overseeing options strategies.
Investors have shown interest in products that tend to profit when volatility rises. For example, assets held in those types of exchange-traded products hit a record high of $3.1 billion in May, according to FactSet data. People piled into bets that volatility would fall in early 2018, trades that backfired spectacularly when turbulence hit.
As markets have swung, investors have also turned to the relative safety of government bonds. They have sent the yields on 10-year Treasurys, which fall as bond prices rise, near their lowest levels of the year.
In another sign that traders are wagering on volatility, they’ve turned to options on the Cboe Volatility Index, or VIX, recently sending volume to the highest since February 2018.

Market Facts

  • Investors pulled $19.5 billion out of global mutual and exchange-traded funds in the week ended May 15, while bonds added $5.1 billion for their 19th week of inflows, according to a Bank of America Merrill Lynch analysis of data from fund tracker EPFR Global.
  • Of the more than 90% of companies in the S&P 500 that have reported first-quarter earnings, 76% have delivered earnings per share above the mean estimate, according to FactSet. Earnings have exceeded expectations by 5.4%, which tops the five-year average of 4.8%.
  • On this day in 1999, eToys, a startup internet retailer, went public on the Nasdaq. Initially expected to be priced at $10-$12 per share, the stock was underwritten at $20 and quadrupled before the opening bell rang. Shares roared to a high of $85 before closing at $76.56. Just 19 months later, on February 26, 2001, the company announced that it would file for bankruptcy.

Key Events

The Chicago Fed National Activity Index for April will be released at 8:30 a.m. ET.
Fed Chairman Jerome Powell headlines a full slate of central bank speakers: Atlanta's Raphael Bostic gives welcoming remarks at a financial markets conference at 8:25 a.m., Philadelphia's Patrick Harker speaks at Management Science’s 65th Anniversary at 9:30 a.m., New York's John Williams gives welcoming remarks at a "Fed Listens" roundtable at 1 p.m., Vice Chairman Richard Clarida speaks about the Fed's policy strategy review at 1:05 p.m., and Mr. Powell speaks about assessing risks to the financial system at 7 p.m.

Must Reads

Recent stock-market volatility has boosted appetite for the Japanese yen and other traditional havens. PHOTO: Keith Bedford/Bloomberg News
Havens are holding steady as stock-market swings continue. Investors seeking shelter during the most recent bout of stock-market volatility have favored traditional havens like the Japanese yen and Swiss franc but remained cooler toward the dollar, a sign that some are growing more cautious on the U.S. economy.
Spending slowed as companies weighed trade concerns. Spending on factories, equipment and other capital goods slowed in the first quarter among a broad cross-section of large, U.S.-listed firms, bolstering investor concerns that a key driver of economic growth is fading.
Despite Mideast tensions, OPEC is inching closer to maintaining production cuts through 2019. OPEC and its allies have been looking at a handful of scenarios as producers seek a balance between supply fears and a possible oil glut.
Don’t get too used to higher bank deposit rates. Investors increasingly think the Federal Reserve is on course to cut interest rates at least once this year. That makes it likely banks could start to reverse course on deposit rates.
BlackRock and other big investors spoiled Uber’s coming-out party. Uber Technologies grew to be the nation’s most valuable startup thanks to support from some of the biggest investors around, but that support became a liability when the ride-hailing giant made its stock-market debut.
Even Harvard is now teaching personal finance. Ivy League universities haven’t typically focused on basic financial life skills. That is starting to change, thanks in part to rising debt levels for young Americans and growing anxiety about their economic futures.
Trian is nearing a settlement with Legg Mason, and it could get up to four board seats. Money manager Legg Mason is nearing a settlement with Trian Fund Management that would give the activist hedge fund three or four seats on its board and avoid a proxy fight, according to people familiar with the matter.

What We've Heard on the Street

“Takeout stocks plunged on Friday after Amazon announced an investment in a fast-growing meal-delivery startup. But investors may need to look elsewhere for the real victims of all the cash flowing into a sector that epitomizes the promise and profligacy of Silicon Valley.”
—Heard on the Street columnist Stephen Wilmot

Stocks to Watch

Caterpillar: Industrial stocks are in focus Monday after the sector was among the biggest decliners in the S&P 500 on Friday, shedding 1.1%.
MylanShares of the drugmaker have dropped 28% in 2019 through Friday, their worst start to a year on record based on data going back to 1973, according to Dow Jones Market Data.
Coty: Shares of the cosmetics giant have climbed 25% so far in May, their best start to a month since February.
Under Armour: The company's stock climbed 7.6% last week, its largest weekly gain since November.

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