MW Traders price in stock-market fear gauge jumping ahead of U.S. election
By Christine Idzelis
The Cboe Volatility Index has subsided this week, but futures contracts point to a 'steep' climb heading into October, says OptionMetrics.
Stock-market volatility has come down this week, after President Joe Biden exited the White House race over the weekend and endorsed Vice President Kamala Harris as Democratic nominee.
But the futures curve of the Cboe Volatility Index suggests investors should prepare for a potential bump higher in October, ahead of the Nov. 5 election for U.S. president, according to Garrett DeSimone, head of quantitative research at OptionMetrics.
"You've got this steep increase from the September to the October contracts," with the market pricing in the risk of higher volatility as the presidential election nears, DeSimone said in a phone interview. "After that, it flattens out a little bit."
The shape of the Cboe Volatility Index's futures curve is "very similar" to the one seen around the 2020 presidential election in the U.S., although stock-market volatility generally was higher back then, partly due to the pandemic, he said.
The Cboe Volatility Index, or the stock market's so-called fear gauge, fell almost 10% Monday to 14.91. The index VIX was trading lower Tuesday morning, at 14.52, remaining below its long-term average of around 20, according to FactSet data, at last check.
The index jumped 32.6% last week ahead of Biden's Sunday decision to leave the White House race, amid growing calls from Democrats for him to bow out. That marked the biggest weekly jump since March 2023 for the volatility gauge, known by its ticker symbol VIX.
While the VIX has declined since Friday, the shape of the futures curve on Monday still had the same, steep "hump" shape, said DeSimone.
The price of the VIX's October futures contract, which expires on the 16th of that month, settled July 19 at around $18.30, according to DeSimone. That was above the settlement price for the futures contract expiring in September, which was slightly more than $16.50, his research found.
On Tuesday morning, the VIX's September futures contract (VXU24) was trading at $15.55, while the October contract (VXV24) was at $17.60, according to FactSet data, at last check.
Meanwhile, Harris has enough support from Democratic delegates to become nominee of the party, according to an Associated Press report. Her presidential campaign swiftly raised money from donors following Biden's decision to pull out of the race.
See: Harris campaign says it has raised $100 million since Biden's exit from White House race
Beyond politics, traders' worries over the uncertain path of interest rates may also be influencing the shape of the VIX's futures curve, said DeSimone.
Investors expect the Federal Reserve may start lowering its benchmark rate as soon as September, following its two-day policy meeting that month, as inflation has eased significantly from its 2022 peak.
Federal-funds futures indicate a 93.6% probability that the Fed may cut its benchmark rate by a quarter percentage point that month to a target range of 5% to 5.25%, according to the CME FedWatch Tool, at last check.
Investors are closely monitoring inflation and U.S. economic growth for clues on the potential path of rates this year, with data on gross domestic product and inflation due out this week.
The U.S. Bureau of Economic Analysis will release its GDP estimate for the second quarter on Thursday. On Friday, investors will get a reading on June inflation from the personal-consumption-expenditures price index, the Fed's preferred gauge.
After September, the central bank's next two-day policy meeting will conclude on Nov. 7, after the U.S. presidential election.
The U.S. stock market has rallied in 2024, with the S&P 500 rising 16.7% through Monday.
On Tuesday morning, major U.S. stock indexes were trading higher. The S&P 500 SPX was up 0.1%, while the Dow Jones Industrial Average DJIA rose 0.3% and the technology-heavy Nasdaq Composite COMP increased 0.6%, according to FactSet data, at last check.
With U.S. stocks in a bull market, the VIX has been trading at a relatively low level..
For all the uncertainty surrounding the macroeconomic and political environment, at least for now, "it's still a low vol market," said DeSimone.
-Christine Idzelis
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(END) Dow Jones Newswires
July 23, 2024 11:36 ET (15:36 GMT)
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