Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide. Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.
The opinions expressed below are my own
Relief. North Korea didn’t launch a missile and Irma doesn’t appear to have done as much damage as feared. Overseas markets rallied a bit more than a percent and we did the same. Capital flow was normal at 102% today and it sure looks like buy-the-dippers jumped in with both feet and did what they like to do.
I saw an estimate that Harvey and Irma would cost about 1.5% of US GDP. I don’t know if that’s the total cost of damage or if that’s the estimated dip to near-term GDP but regardless, the point is that the expectation is that economic softness is en route (not enough to cause a recession though).
The markets are therefore assuming the Fed isn’t going to hike for a while. Fed funds futures markets are pricing in a near-zero percent chance of a hike in Sep and Nov and a 35% chance of a hike in Dec. A lot of anticipated hiking (especially in years ’18-’20) has dropped out of expectations (see below Fed Funds future curves).
With the Fed slowed down for a while, the equity party seems poised to continue. Despite the crisscross of different risks that sprung up last week, investors don’t appear to want to retain a cautious mindset.
Implied volatilities dropped considerably across the curve today.
It’s going to take a new negative catalyst to rattle the market. We currently have no predisposition to concern.
In the short run, probably only bolt-from-the-blue events will change that. In the medium term, earnings season kicks off in early October. Earnings seasons have been quite good this year and they’ve provided the fundamental support for much of the equity rally. If the coming season can’t deliver, I think valuations and volatility levels will have to adjust.
See you tomorrow,