On Friday (September 6th), Morgan Stanley's sales and trading department stated that the high position and the high degree of uncertainty determined by the decision of the Federal Reserve interest rate may cause significant market volatility due to employment data.
Morgan Stanley's sales and trading expert, Amanda Levenberg Goldsmith, wrote, "Stock options imply that the employment report on Friday will bring significant volatility." They added that it is reasonable to price such uncertainty as the uncertainty about what action the Federal Reserve will take in the next two weeks is unprecedented, at least in this cycle.
The implied volatility of the S&P 500 index has always been low compared to the actual volatility, implying that the stock market is becoming increasingly sensitive to macroeconomic data. Options imply that the S&P 500 index will rise or fall by 1.1% on Friday, while ETF options tracking the Russell 2000 index and the Nasdaq 100 index imply a rise or fall of 1.84% and 1.37% respectively.
(Image source: Bloomberg)
Investors have been waiting for the non-farm payroll monthly report to be released on Friday to assess whether the US economy is heading for a soft landing as the Federal Reserve prepares to ease policies. The forward market currently expects the Fed to cut interest rates by 25 to 50 basis points at its next meeting on September 18th.
Data released on Thursday before the report showed that US companies added the fewest jobs since early 2021, while weekly applications for unemployment benefits were lower than expected.
Despite experiencing several rounds of volatility in early August, asset management companies still have a high exposure to US single stock futures, which means that if there is poor employment data, the risk will lean towards the downside.
Morgan Stanley estimates that from the perspective of systematic macro strategy flows and positioning, it is expected that the stock supply next week will reach 15 billion to 20 billion US dollars. At the same time, the department pointed out that the correlation between the stocks in the S&P 500 index has been increasing, and if the correlation further increases, it indicates that long funds are now selling more actively.
They said, "Long positions are still the area with the highest risk exposure."