Source: Zhitong Finance

From inflation data to$NVIDIA (NVDA.US)$As for performance, risk events one after another have been subdued, and there is almost no disturbance to slow down the upward trend in the market. Volatility is only going to decline this month due to high demand for options sell-offs.

On Thursday morning, the VIX index fell to its lowest point in nearly five years: 11.5 points, then rebounded slightly. This level is a few points below the historic low in 2017, which was the least volatile stock market in modern history. The three-month implied volatility of the S&P 500 closed this week at its lowest level since October 2018.

The stock market is no exception: oil, bonds, credit, and even foreign exchange indicators that measure volatility are slowly falling. OPEC+ production cuts have stabilized the oil market within a range. The decline in real interest rate volatility and the narrow outlook for G10 currencies have kept implied interest rates under control.

Looking ahead, there aren't many opportunities for surprises in the near future. Earnings season is coming to an end, and summer vacations in Europe and the US are coming soon. OPEC+ representatives expect the organization to extend production cuts until the second half of this year at a virtual meeting to be held on June 2. Most Wall Street Bank predictions suggest that the Federal Reserve will cut interest rates in September or later.

Since the stock market has repeatedly reached new highs, and nothing seriously threatens the rise, investors have little incentive to short the market. Demand for hedging is very low. Long put option positions do not pay off in the event of a sharp decline, and a sharp decline is quickly reversed. At the same time, the boom in investment instruments designed around selling options has driven down volatility.

Options traders' positions are also not helping to stimulate greater volatility. Traders go long on gamma. Gamma acts as a market stabilizer when trading departments sell on high and buy on dips to rebalance their books.

“As the S&P 500 continues to rise, the positive gamma is getting thicker,” the Spotgamma strategist said on Thursday. “A higher gamma value means a narrower trading range and less upward volatility.”

Meanwhile, the size of volatile sellers is growing month by month, and the assets managed by derivatives income funds have now reached 200 billion US dollars. They supply more than 250 million vega to the market each month, curbing market volatility in an unprecedented way.

The Tier 1 Alpha strategist wrote that the overall market calm contrasts with perceived fundamentals, and the surprise of the US economy is now close to the slump level of May 2022.

“May 2022 was the middle of a sharp decline in the S&P index. A few weeks later, we dropped from 4,800 points to 3,700 points. This cycle hasn't happened yet. It's a great reminder that markets are not economies.”

2024 is an election year for the US and other countries. One important question is how long the low volatility situation will last. The implied volatility of the Indian stock market rose sharply during India's general election this month.

Despite being low compared to other election years, VIX futures have become more sensitive to this event, and the October contract has a premium over the September and November contracts. Last week, the fluctuation of the pound over the past two months intensified due to the risk of the British July 4 general election.

Tanvir Sandhu, chief global derivatives strategist at Bloomberg Intelligence, said, “The distortions commonly seen in the Volatility Index (VIX) futures curve associated with the US election occurred very early this time.”

editor/tolk