Interview
Equity Volumes, Volatility and ‘Skew’ in the Markets
- Retail investor inflows are expected to dominate the market for a shorter horizon, characterized by one-to-two-week option trades rather than multi-year timeframes.
- Volatility is projected to remain elevated until a regime shift toward lower index volatility occurs, driven by increasing sector dispersion where sectors move in opposite directions.
- A larger fiscal stimulus package is anticipated to be viewed favorably by equities and growth, though it carries the risk of higher nominal yields becoming problematic if growth fails to accelerate further.
- Runaway inflation without significant growth is identified as a potential issue as investors reassess debt sustainability and government debt issuance.
- If the Federal Reserve anchors rates while inflation rises under the new average inflation target framework, the outcome is expected to be positive for the equity market.
- Volatility is expected to normalize following specific political events (U.S. elections, Georgia election, inauguration); failure to do so indicates a lack of liquidity formation.
- A divergence in skew trades is expected to persist, with index skew trading high due to institutional demand for downside protection while single-stock skew trades flat due to retail dominance.
- Higher volumes of small-order-size trades are expected to continue translating into elevated market volatility levels.
- ETF shorts currently exceed 20% of the short book, a record level that is currently a focus for the market.
- The "no alternative" equity inflow equation faces a risk of change if nominal yields rise as a result of larger fiscal stimulus.
- Base effects from the middle of the year combined with "revenge spending" are expected to create conditions for higher inflation.
- Equities are expected to disregard weak data, such as poor payroll prints, increased COVID variants, and slower vaccine rollouts, due to their forward-looking nature.
- Liquidity sellers are expected to remain slow to return to the U.S. index space since March of the previous year, contributing to a supply-demand imbalance.
- Market makers are expected to continue serving as the primary intermediaries for retail flows instead of larger banks and institutional players.