October Calm Keeps Market Swings Below Monthly Average
Even with a deadline looming for the U.S. to avoid a debt default, it’s been a comparatively calm October for financial markets.
Daily swings in the Standard & Poor’s 500 Index (SPX) have averaged 0.78 percent so far this month, down from 0.9 percent for Octobers over the last eight decades and less than a quarter the moves in 1929, 1987 and 2008, data compiled by Bloomberg show. Bank of America Corp.’s Market Risk Index that uses options to forecast fluctuations in equities, currencies and bonds reached minus 0.74 last week, the lowest since May 21.
Confidence that Congress will reach an accord to reopen the government and keep debt payments flowing has limited volatility even after the S&P 500 rallied 20 percent since December and 153 percent since March 2009. Bank of America’s measure of future risk has slipped from a one-year high of 0.3 percent in June and is lower than the level from August 2011, when investors faced the another threat of American default.
“There’s a lot less fear,” Jim Russell, who helps oversee $112 billion as a senior equity strategist for U.S. Bank Wealth Management, said by phone from Cincinnati. “Most investors look at Washington now and kind of look through this series of headlines and events. We know you have to reopen the federal government eventually and you have to raise the debt ceiling.”
Shares climbed for a fourth day yesterday as Democrats and Republicans in the Senate voiced optimism about ending the impasse. While BlackRock Inc. and Fidelity Investments have reduced holdings of the riskiest U.S. Treasury maturities in money-market funds, the S&P 500 is within 20 points of a record.
The S&P 500 erased its decline for October after rallying 3.3 percent in the last four sessions. While daily changes in the benchmark index are almost twice the mean for September, they’re small for a month that has seen the biggest swings in U.S. equities, according to data compiled by Bloomberg.
Of the 10 most volatile months on record for the S&P 500, five were Octobers, according to data compiled by Bloomberg. The most extreme was in 2008, when the S&P 500 rose or fell an average of 3.88 percent a day following the bankruptcy of Lehman Brothers Holdings Inc.
Stock market crashes in October 1929 and 1987 caused the market to move more than 3.5 percent a day, on average, data compiled by Bloomberg show. Equities posted a monthly plunge of 20 percent in the Crash of 1929 prior to the Great Depression and slumped 22 percent in October 1987, including a 20 percent drop on Oct. 19 known as Black Monday.
Failure to reach a timely solution on the debt-ceiling followed by a default on American government debt would be historically unprecedented, causing investors to sell stocks, Michael James at Wedbush Securities Inc. said. That is prompting hedging with securities tied to the Chicago Board Options Exchange Volatility Index (VIX), which increased 2.2 percent to 16.07 yesterday even as stocks advanced. The VIX added 4.2 percent to 16.74 today at 10:01 a.m. in New York.
“In case something doesn’t occur and there is a technical default, the market could go into a significant short-term decline,” James, a Los Angeles-based managing director of equity trading at Wedbush, said yesterday in an interview. “Portfolio managers are buying the VIX as a means of a portfolio hedge in case of a default because the potential downside would be meaningful.”
Volume on VIX options soared to a single-day record of 1.78 million on Oct. 8 as traders bought contracts that rise when stock swings increase. About 1.14 million calls changed hands and more than 639,000 puts, data compiled by Bloomberg show.
Still, the VIX has erased its increase since the government shutdown began Oct. 1. The gauge moves in the opposite direction as the S&P 500 about 80 percent of the time.
Stock swings will narrow by December as a resolution is reached on the debt ceiling and the Federal Reserve continues its quantitative-easing program, Susquehanna Financial Group LLLP’s Trevor Mottl, wrote in a note yesterday.
The Federal Open Market Committee left its bond buying program unchanged in September. The central bank’s decision to keep purchasing $85 billion in mortgage and Treasury debt a month dimmed odds that government debt yields would rise substantially over the rest of the year.
“We expect that continued QE, at least through the end of the year, should lead to decreasing S&P 500 volatility as we approach year-end, provided that politicians in Washington arrive at a resolution on the debt-ceiling sometime between Oct. 17 and Nov. 1,” Mottl, Susquehanna’s New York-based head of derivatives strategy, said.
Bank of America Merrill Lynch’s MOVE Index, a measure traders’ expectation for the pace of swings in bond yields based on volatility in over-the-counter options on Treasuries maturing in two to 30 years, was 77.11 on Oct. 11, below the average level of 72.46 for 2013 so far, and below the year’s peak of 117.89 on July 5.
The $5.4 trillion a day foreign exchange market has mirrored the signals from the debt markets, with traders scaling back projections for volatility in currencies from the U.S. dollar to the Indonesian rupiah.
“The debt-ceiling issue is leading many to believe that the Fed will stay on hold for longer,” Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York, said via phone yesterday. “More broadly, the hit to growth and sentiment may have similar impacts on other central banks. Expansive central bank policies tend to crush implied foreign exchange volatility.”
A JPMorgan Chase & Co. index of global foreign-exchange volatility that tracks options on currencies of major and developing nations was 8.22 percent yesterday, down from a high this year of 11.77 percent on June 24. The bank’s index, tracking implied volatility of the most actively traded currencies and those of emerging markets, averaged 12.03 percent over the past five years.
Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency.
“Global markets are second guessing the outcome of the negotiations by assuming that something will happen before the Oct. 17 deadline,” Abhinandan Deb, the London-based head of European equity derivatives strategy at Bank of America, wrote in an e-mail yesterday. “The alternative could be just too ugly to contemplate.”
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