Crude oil futures rebounded sharply this morning, with West Texas Intermediate futures contracts for front-month delivery edged up past $31 per barrel, up more than 15 percent from the lows hit Wednesday. The move comes after prices reached the lowest level in a dozen years earlier in the week and U.S. Commodity Futures Trading Commission data revealed the largest net-short position in oil since 2006, suggesting that short covering drove today’s bullish move. While the bounce may prove to be temporary, European equities got a bounce aided by European Central Bank president Mario Draghi’s hint at more stimulus yesterday. French bourse CAC 40 was up more than 3 percent in early trading. With sentiment for commodity markets broadly — and energy in particular — near all-time-lows, the collateral damage to financial markets remains massive. Yesterday Moody’s Investors Services reported that the credit rating of dozens of energy producers are under review for a potential downgrade, spurring more pressure for high-yield bond investors.
Nabiullina skips Davos as ruble collapses. The Bank of Russia issued a statement that bank governor Elvira Nabiullina has canceled her trip to the World Economic Forum at Davos to hold an emergency policymakers meeting in response to the ruble’s continuing decline against major currencies in light of the recent sell-off in oil markets. As of 2012, oil and gas production accounted for more than 15 percent of Russian GDP and more than half of federal government revenues, according to the World Bank.
Yahoo! rejects offers. Reuters reported yesterday that Sunnyvale, California–based Internet company Yahoo! has solicited offers for its core internet business in advance of the fourth-quarter earnings release, scheduled for February 2, as management there considers strategic options. According to the report, based on anonymous sources, the company intends to continue with a spinoff of the unit, provided it can achieve favorable tax treatment.
European PMI weaker than expected. Final December composite purchasing manager index data for the euro zone released today by Markit was weaker than consensus forecast at 53.5 versus an initial 54.1. Both service sector and manufacturing components were revised downward.
Portfolio Perspective: Facing the Reality of Financial Market Risk — Jim Strugger, MKM Partners
On no occasion over the almost 30 years of available data has a volatility event of the magnitude experienced last August not occurred amidst a high-volatility regime or signaled the beginning of one. That event, and the subsequent elevated floors under VIX and VVIX, were the reasons we at MKM Partners abandoned our long-held view that the period of structurally low volatility would stretch toward the five-year historical average.
The importance of this transition in our work can’t be understated. There have been two recessions and bear markets since the mid-1990s, all contained within high-volatility regimes. There’s little doubt that a period of elevated financial market risk has begun — evident by cyclical shifts in VIX, VVIX, GFSI and realized volatility via the SPX intraday high-low spread.
During both the 1990s and 2000s high-volatility regimes, there were ten shocks that spiked spot VIX into the high-20s — so roughly two events per year — with the distance between them positively correlated with magnitude. As much as focus is on the volatility event at hand, there has to be an appreciation for the duration of this new risk environment.
Jim Strugger is a managing director and derivatives strategist for MKM Partners in Stamford, Connecticut.
