Equity Volatility Surges Globally Amid Record Futures

Stock volatility jumped around the world, with the U.S. benchmark gauge surging the most in two months, after speculation the Federal Reserve will cut stimulus sent futures trading to an all-time high.

The Chicago Board Options Exchange Volatility Index, which tracks options on the Standard & Poor’s 500 Index, climbed 9.1 percent to 18.15 at 12:38 p.m. in New York today. Europe’s VStoxx Index, a gauge of Euro Stoxx 50 Index derivatives, gained 16 percent to 23.61, and Hong Kong’s HSI Volatility Index, based on Hang Seng Index contracts, rose 7.7 percent to 22.72, near a one-year high. About 218,000 futures tracking the U.S. VIX changed hands each day on average in June, 49 percent more than the previous month, data compiled by Bloomberg show.

U.S. stocks dropped, with the S&P 500 (SPX) down more than 2 percent since June 18, after Fed Chairman Ben S. Bernanke said the central bank may “moderate” its pace of bond purchases later this year as economic risks subside. Equity swings are getting bigger and the Dow Jones Industrial Average has posted triple-digit moves for the past seven days, the longest streak since October 2011.

“The activism of the Fed can’t go on forever and people try to be ready for it going the other way when the cracks start showing up,” Justin Golden, a partner at Lake Hill Capital Management LLC, said in a phone interview yesterday. The New York-based hedge fund trades options on equity indexes and commodities. “People are anticipating a shift in the market and they are using VIX (VIX) products to get in front of it.”

Photographer: Tim Boyle/Bloomberg

Traders work in the S&P 500 pit of the CME Group's Chicago Board of Trade. Close

Traders work in the S&P 500 pit of the CME Group's Chicago Board of Trade.

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Photographer: Tim Boyle/Bloomberg

Traders work in the S&P 500 pit of the CME Group's Chicago Board of Trade.

VIX ETN

Speculation the central bank will begin withdrawing its stimulus measures has boosted trading in an exchange-traded note tracking U.S. volatility. The iPath S&P 500 VIX Short-Term Futures ETN (VXX) was the third most-active ETF in the U.S. yesterday, with 86.7 million shares changing hands, according to data compiled by Bloomberg.

Options outstanding on the iPath VIX ETN have jumped 34 percent this year, reaching an all-time high of 3.48 million on June 13, the data show.

The S&P 500 lost 1.4 percent to 1,628.93 yesterday for the biggest drop since May 31. The VIX climbed 0.2 percent to 16.64. The two gauges move in opposite directions about 80 percent of the time.

Economic Outlook

Risks to the economic outlook and the labor market have diminished, the Federal Open Market Committee said at the conclusion of a two-day meeting yesterday, repeating that it’s prepared to reduce or increase the pace of bond purchases depending on the outlook for jobs and inflation. U.S. equities and government debt extended losses after Bernanke said the central bank may begin tapering bond purchases this year if the economy continues to improve.

Fifteen of 19 participants on the FOMC expect the first rise in the federal funds rate to occur in 2015 or later, forecasts released yesterday showed. That exceeds the 14 of 19 who projected in March the first rate increase would happen after 2014.

Ramon Verastegui, a derivatives strategist at Societe Generale SA in New York, said an increase in equity volatility will follow from fluctuations in the rates market as the Fed reduces the pace of bond purchases in an improving economy.

MOVE Index

Bank of America Merrill Lynch’s MOVE Index rose to a one-year high of 86.89 yesterday, up from a 2013 low of 48.87 in May. The gauge, which measures volatility based on prices of over-the-counter options on Treasuries maturing in two to 30 years, has averaged 62.2 in the past year.

“Volatility in the bond market will translate into equities and the VIX as we begin to leave QE behind us,” Verastegui said by phone. “The VIX market is much more liquid so when people want to play a scenario of less monetary easing and rising rates, they drift into equity volatility.”

The Fed isn’t likely to make any sudden changes to its bond buying program during the next four months, according to John Manley, chief equity strategist for Wells Fargo Funds Management. The central bank repeated yesterday that it will keep buying assets “until the outlook for the labor market has improved substantially.”

‘More Calm’

The U.S. unemployment rate climbed to 7.6 percent in May from a four-year low, above the Fed’s goal of 6.5 percent for the central bank to consider raising interest rates.

“We will see more calm,” Manley, whose firm advises $222.7 billion in Wells Fargo Advantage Funds, said in a telephone interview. “It’s just another example about how nervous Wall Street is about everything and it will gradually fade back to a more normal level of implied volatility.”

The VIX has surged 47 percent from a six-year low in March. The volatility gauge is still 33 percent below its average from the past five years.

Traders are boosting bets that U.S. stock-market volatility will increase during the next three months, sending options prices to the highest levels in 1 1/2 years relative to six-month contracts.

Implied volatility for three-month contracts has climbed 26 percent to 14.7 from its March 14 low, according to data compiled by Bloomberg on options with an exercise price near the S&P 500. That compares with a 17 percent increase to 15.5 for six-month contracts. The ratio between the two measures reached 0.98 last week, the highest since December 2011.

“The Fed’s stimulus actions have absolutely suppressed equity market volatility and a reversal of those actions is likely to increase volatility,” Michael McCarty, managing partner at New York-based Differential Research LLC, said in a phone interview yesterday. “That’s why people are going into the VIX and the volatility products.”

To contact the reporters on this story: Cecile Vannucci in London at cvannucci1@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net; Andrew Rummer at arummer@bloomberg.net

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