Below is a quick summary of how equity market risk has performed this week.
On Monday we wrote:
Is it time to panic? Well, that nobody knows, but given the fact volatility is up substantially over the past weeks one really needs to discount rather bad times going forward in order to buy volatility at these levels. Volatility is a mean reversing asset, let’s not forget that.
We also concluded:
Buying volatility here outright is a rather late trade, unless you really fear an imminent market collapse or you need to hedge your book desperately.
This week has been all about China and the Trade War. Interesting to note is the fact developed world equity risk actually came off substantially.
Euro Stoxx 50 volatility, V2X, is down approximately 20% from Monday highs. This is a far more fair level than what we saw earlier this week. Hedging the portfolio makes much more sense at these vol levels.
VIX has also been declining from the Monday spike and is down some 20% from week highs. With Q3 earnings coming up soon options plays or hedges are much more attractive at these levels for investors looking to enter long premium strategies.
Do note that not all equity risk is down. Emerging Market “VIX”, VXEEM Index, is up over the past two weeks.
Below is a chart showing VIX, V2X, and VXEEM (green). We can clearly see that developed market risk has come off this week, while the Emerging Market risk remains “worried”.
Source: charts by Bloomberg
