Today’s Daily Dose was hosted by Greg Sterijevski. Dr. Sterijevski is the founder of CommodityVol.com, the web’s preeminent source of implied volatility and market statistics centered on commodity markets. See end notes for details about Dr. Sterijevski and his product offerings.
-Optimistic data points are hardly optimistic
-Policymakers dither while Rome burns
Major US markets were up strongly yesterday. Crude prices are $40.66 per barrel for WTI and $43.18 per barrel for Brent this morning. This reversed yesterday’s mild strength after a strong draw in the EIA report. The Energy Information Agency reported Wednesday that refiners consumed 389,000 more barrels than the prior report week. This is certainly very encouraging as this suggests more end-user demand, but crude oil inventory remains above 20% over last year’s number. It did decline about 2% over last week. On net, the picture is hardly one of broad-based strength. Gasoline production was down 10% year-over-year, with the biggest impact on the Rocky Mountain, West Coast and East Coast regions. There were massive week-over-week improvements, especially on the Gulf Coast. Jet fuel production was up slightly week-over-week, but the prior year comparison is horrific. Production is down 51%. Improvement, yes! Is it something to crow about? No!
The price for Brent crude oil was down 1.7% as of 7:30 a.m. ET to trade at $43.34 per barrel. Headwinds were supported by a Japanese return to recession, an 11% dip in German GDP and expectations of a 34.6% GDP crash in the United States. Lawmakers in the United States, the world’s largest economy, seem to not be listening to the adults in the room pointing to the economic cliff.
Heading into the numbers, the options market was very lackadaisical. The largest calls were the 45 dollar strike and, in general, the trade was composed of calls trading in the strike range from 40 to 45. Puts were mostly concentrated in that range as well. The front-month implied volatility acted as if it was stuck with super glue. The at-the-money (ATM) strike and vol. kept a tight range as did the wings. This is interesting coming on the heels of Hurricane Hanna in the Houston area and the updated projected path of the near Tropical Storm Isaias. At the moment, the models take Isaias up the center of Florida, but another Gulf hurricane is not out of the question. It is tempting to say this is “priced in,” but in reality, the volatility curve has only shown weakening in the ATM volatility with a concomitant rise of the wings as the curve approaches expiry. The situation is one of summer time complacency. Trouble is brewing in the Middle East, a storm is brewing on the Florida/Gulf Coast, the market is on vacation or perhaps the glut in supply provides such a buffer that no one is concerned.
Overall, the equity market continues its upward move lead by the tech-heavy Nasdaq index and the Russell. The Russell rocketed up 2.1% while Nasdaq was up 1.35%, which outpaced both the S&P500 (1.24%) and the Dow (+0.61%). The Nasdaq is up for the year and, while the implied volatility is up over last year, the front-month options have exhibited the same lackadaisical view of risk that exists in other markets. The volatility curves for equity index futures all seem to be frozen in place with minor technical moves. The proximal cause for the market rally Wednesday were comments in the Fed’s interest rate policy announcement. While the Fed Funds target stayed in the 0 to 25Bps range, they renewed their commitment to a further ameliorative policy with respect to interest rates. The lack of inflation and the ongoing economic dislocations caused by the coronavirus pandemic seem to imply that low rates are here to stay. The Fed committed to further increases in their holdings of Treasuries and mortgage-backed fixed income securities. At some point, they may run out of issuance to buy; until then it is to infinity and beyond! The CBOT 30-Year and 10-Year volatility are both in the doldrums. The Fed buying destroys any perceived risk; no need to worry about insurance, it is all on the house!
Coupled with the Fed moves, there was a lot of COVID-19-related news flow and much was perceived positive. Moderna released data on its COVID-19 vaccine candidate that indicated some level of immune response in monkey recipients. The response seems to occur in both the upper and lower respiratory tract. However, the commercial prospects for these vaccines arepf dimming in light of Pfizer’s mega-deal with the government. Additionally, as in China, a plasma-based treatment is being reviewed by federal health officials. The treatment would involve harvesting antibodies from the blood of donors who recovered from COVID-19 in the hopes that the antibodies might prime the recipient’s immune system.
On the political front, there was no agreement on the coronavirus bill in the United States. Both House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin were noticeably demur on the possibility of some sort of extension of the previous aid bill. The haggling is most likely a prelude to some sort of deal. The net effect of a very dovish monetary policy and the prospects of rivers of new debt to fund support programs has the dollar under significant pressure. On this point, both the president and congressional leaders are probably quite pleased. From the president’s view, the weak dollar will bolster exports. Congressional leaders are counting the votes that the spending will deliver. It is a win-win, except for the poor saps who hold dollars and transact in dollars. There is noticeably less cheer in those quarters. The dollar is losing ground against the euro, yen and pound. Not coincidentally, the vol. in those markets is coming alive. The major trading partners to the United States will not sit on their hands. As the US embarks on a “beggar thy neighbor policy,” expect the EU and Japan to aggressively cheapen their currencies. The direction of the rates may be unclear, but one might want to consider taking a peek at the straddles in each market.
Everything seems to be on the precipice of major upheaval. Protests convene nightly. The hysteria around the COVID infection shows no signs of abating. The energy market shows marginal improvement against bleak year-over-year comparisons. Tension between Israel and Iran continues. There is drama between the Druze and everyone else in Lebanon. The Russians are purported to be making a play for Libya. Yet, the insurance market (options) acts mostly unconcerned. Volatility is higher than last year, but it is merely approaching its historical and statistical norm; as if to say, “no big deal, we have this.” This is, unfortunately, not a new script. The Fed followed a similar script post-2008. Then, as now, loads of hot money goosed markets and stamped out realized and implied volatility. They are hoping for a second act to rival Steve Jobs’ revival of Apple after his return. Unlike Apple, the tricks the Fed are using are old and well known. Maybe they will pull an Ipod out at the Marriner Eccles building, but they may be going to the well one too many times with the same trick.
Chabris and Simons of Harvard ran a video experiment in which participants were asked to count how many times a basketball was passed between students in white shirts and students in black shirts. At the end, the authors asked their subjects how many noticed the man in the gorilla suit. None had. I fear the riots and pandemic are examples of the “Invisible Gorilla” situation. The massive expansion in bankrupt policies, crony business and implosion in the real economy is the gorilla. It dances in front of us while we are preoccupied with red state/blue state ball passing.
Greg is the co-founder of The Asset Risk Company, the creator of the world’s first commercial commodity factor model. He holds a PhD in Economics from the University of Illinois at Chicago. He started his career at the SAS Institute, building statistical techniques and codes for the flagship SAS System. His career took him back to Chicago and its financial markets. There, he helped create and release the first Monte Carlo Margin Model for equity options. He has since held positions in market making options and futures in commodity markets, long short equity trading among other endeavors. His roles have included; quant, risk manager, partner and trader. The constant has been a model and datacentric approach to risk and trading.
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