Q3 had a few competing storylines. There was the growing conflict in the Middle East, the Fed’s first rate cut in more than 4.5 years, and a dramatic spike in volatility prices in the early morning hours of August 5th,
Zooming out, we can see the market was little concerned with all of it, hitting new all-time highs in July and again in September.
But all was not well in the early morning, pre-market hours of August 5th; with the VIX spiking 180%, S&P futures down nearly -5%, Nasdaq futures down -6.5%, and Japan’s Nikkei index falling -12.5%!
With the benefit of hindsight, we can now see that the hours-long volatility was exacerbated by thin liquidity conditions and that the pre-market VIX print was effectively meaningless, with front-month VIX futures actually declining while the cash index surged, indicating hedging demand was overstated, to say the least.
Risk.net reported that underlying fundamentals alone could not explain the volatility and instead was driven by large trades of S&P 500 puts and VIX triggering dealers to widen spreads. But we can all see now, after the fact, that it wasn’t a ‘real move’ based on the quick snap back of the overall markets over the following days.
The third quarter acted as a bit of a warning shot across the bow, in our opinion. What seemed like the beginning of the next market correction quickly reversed course. But to us that shows just how fragile these market highs are. Time to have a renewed focus and eye towards downside risks and gaining from volatility.
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