Hurricane Season

Markets largely hung around the flat line in September in an apparent standoff between benign economic data and negative trade headlines. Like previous episodes this year, the negative reactions proved to be sharp and short, causing a brief flash of caution from our dashboard in the early part of the month. Otherwise, it was a quiet few weeks from both a market and trading perspective.

Surveying today’s volatility landscape, we can currently identify a few potential candidates for “spikes” (small Vol Loops) as well as for more substantial “swells” (large loops). Examples of each are below.

Likely candidates for short-term spikes include news flow around US mid-term elections, trade (tariffs) and the Mueller investigation. As with any spike, each of these has the possibility of being quickly diffused or snowballing into something more serious for markets (what we term a volatility “swell”). Of course, it is impossible to know ahead of time which route these will take, so we will continue to stay focused on monitoring changes in the volatility market to guide the best course of action.

Slower-moving but larger “swell” catalysts include the ongoing rate hike cycle and European budgetary issues centered around Italy. In contrast to the spike candidates mentioned above, a strong link to financial system health and a lack of well-defined outcomes or expiration dates give these issues greater potential for sustained volatility. Much like preparing for a hurricane, investors would do well to construct a survival plan in advance.