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Markets may be underpricing major risks from Fed, G-20 meeting

By Joanna Ossinger

Financial markets are signaling investor..

By Joanna Ossinger

Financial markets are signaling investors see little risk of disruption from upcoming events, despite the potential for major shifts in the course of Federal Reserve policy and US-China trade negotiations.

The range of options for this weeks Fed meeting spans a surprise interest-rate cut, a set-up of one down the road or a continued stance of patience, given still-solid economic growth. Late next week, the outcomes of the Group-of-20 summit look binary: either US-China trade talks get back on track, or investors must anticipate further tariff hikes. And the usual run of data must be added to the mix, such as the July 5 payroll report.

Yet despite the potential for major market moves from these events, JPMorgan Chase & Co. strategists estimate that the embedded volatility risk premium is “significantly” below its historical average. The group, including Nikolaos Panigirtzoglou, cited a gauge of implied to realized volatility using 12 measures across five asset classes.

Other oddities include a large number of short positions on futures tied to the VIX — the so-called fear gauge tied to US stocks — and a low amount of hedging as seen in the put-to-call open-interest ratio for S&P 500 Index options, the JPMorgan team wrote in a note Friday.

“Option markets do not embed enough cushion against the significant event risk markets are facing over the coming weeks,” the strategists concluded.

Equity positioning is still on the high side and vulnerable to a spike in volatility.

And then theres equity positioning, which is still on the high side and vulnerable to a spike in volatility, according to Deutsche Bank AG. Positioning from hedge funds is light on US equities though concentrated in the same stocks as the S&P 500, while in equity futures its near the top its historical range, strategists including Hallie Martin and Binky Chadha wrote in a separate report.

Systematic strategies “are heavily allocated to US equities and would be sellers on a significant vol spike into a record low liquidity environment,” the Deutsche strategists wrote. Buybacks, which have been supportive of US stocks, will start to run into quarterly blackout periods later this month coinciding with the G-20 meeting, they highlighted.

There are some markets appearing to gird for stormy weather ahead. Treasuries have been climbing since early May, when President Donald Trump announced hed expand tariffs on Chinese imports. Five-year notes are effectively pricing in a recession, the JPMorgan analysRead More – Source

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