The Tell: Stock-market volatility finally ‘springs to life’ after weak factory data
It wasn’t a panic, but a long-subdued measure of expected stock-market volatility was on track for its biggest one-day rise in nearly two months Monday as investors reacted to disappointing data on U.S. manufacturing activity and a tweet by President Donald Trump that underlined the scope for trade-related turmoil beyond U.S.-China talks.
And even with the rise, the VIX remains well below its long-term average around 19 after last week posting its lowest close since August 2018 — a decline that led some market watchers to declare equity investors were growing complacent about downside risks as major stock indexes hit a series of records in November.
A large number of short bets on volatility futures by speculators had also heightened concerns of a potential blow-up, stirring memories of early 2018, when a massive round of short covering sent the VIX soaring and was blamed for an equity selloff. Futures bets on falling volatility by potentially weak-handed speculators topped 2018 levels to reach a record, analysts at Jefferies noted last week, citing Commodity Futures Trading Commission data (see chart below).
Young and other market-watchers attributed much of Monday’s trade action to a disappointing reading for the Institute for Supply Management’s manufacturing index, which fell to 48.1% in November from 48.3% in October, defying expectations for a rise to 49.2% and delivering its fourth straight sub-50% reading. An index reading below 50% indicates a contraction in activity.
“The culprit is weaker-than-expected November U.S. manufacturing data at a time when investors have been hoping for a positive inflection in global growth,” Young said. “However, in fairness to the bulls, it’s worth keeping a couple of positives in mind — the latest European and Chinese manufacturing data exceeded low expectations and after the recent run-up, stocks were priced for perfection, making them unusually vulnerable to any hint of negative news.”