Time to brace for ‘market turmoil’, warns JPMorgan
Global financial markets have been unusually calm for an extended period, meaning now is a good time for investors to begin preparing for a bout of “market turmoil” that is likely on the horizon, JPMorgan Chase strategists have said.
Risk assets, like stocks, have been rallying “for years”, sending market volatility near “record lows”, said Marko Kolanovic, the New York bank’s global head of macro, quantitative and derivatives research.
“While fundamentally volatility should not be high, it is clear to us that the current macro environment does not warrant all-time low volatility either,” he added.
Federal Reserve rate rises in the US, and receding monetary accommodation from the European Central Bank and Bank of Japan will soon begin removing some of the main factors that have supported the high valuations across financial assets, Mr Kolanovic said.
“Medium term, this is likely to lead to market turmoil, and a rise in volatility and tail risks.”
Mr Kolanovic’s remarks echo those from fellow Wall Street bank Bank of America Merrill Lynch, which warned this week that “peak liquidity and peak profits [mean a] big top in autumn”.
Those are not exactly heart-warming remarks for investors who have seen the value of their portfolios rocket higher since the end of the 2008 financial crisis by employing strategies as simple as owning passive index-tracking funds.
But at the same time, betting against low volatility has been a big loser for traders.
For instance, in the US, the Vix index that measures expectations for S&P 500 volatility has tumbled 8.3 points since the election of Donald Trump in November to far below average levels of just above 10 points.
That has run counter to conventional Wall Street wisdom that suggested Mr Trump’s controversial policies ranging from trade to immigration would stoke market tumult.
For US equities, Mr Kolanovic suggests buying out-of-the-money call options on the Vix.
The derivatives that are currently “close to their cheapest level over the past five years” would gain in value if the Vix rose over a pre-determined period and payout if the index hits a certain “strike” price.
The same strategy can be used for the VSTOXX index, which provides a similar measure of implied volatility for the Euro Stoxx 50 that tracks eurozone blue-chips.
The advice comes at the end of a placid week for US stock markets. The S&P 500 index rose 0.2 for the week to midday on Friday in New York, adding that percentage on Friday morning to 2,439. The Dow Jones Industrial Average traded flat on Friday to 21,404 and the Nasdaq Composite moved 0.2 per cent higher to 6,250.
Elsewhere, Bed Bath & Beyond shares fell sharply on Friday following weak in-store sales numbers announced on Thursday.
The company dropped 11 per cent to $29.99 per share — which is the same price as its Valeron Oversized Luxury Towel Collection.
Net sales rose just 0.1 per cent year-over-year to $2.7bn, missing the $2.79bn that analysts surveyed by Bloomberg had expected. It is the latest in the ongoing woes for bricks-and-mortar retailer battling against the growth of online competitors like Amazon.