Data on the Data
Episode 3: Is Bond Volatility Warning Stocks?
In this week’s episode of Data on the Data, Oliver Hetherington of Refinitiv looks at how bond volatility could affect the recent surge in stock prices. Activity in the US stock market is becoming increasingly polarized between retail and institutional investors and this could have a significant impact on index volatility over coming weeks.
The content and information (“Content”) in the video programs (“Video Programs”) is provided for informational purposes only and not investment advice. You should not construe any such Content, information or other material as legal, tax, investment, financial, or other professional advice nor does any such information constitute a comprehensive or complete statement of the matters discussed. None of the Content constitutes a solicitation, recommendation, endorsement, or offer by Refinitiv or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature, is illustrative only and does not address the circumstances of any particular individual or entity. Refinitiv is not a fiduciary by virtue of any person’s use of or access to the Video Programs or Content. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information or other Content in the Video Programs before making any decisions based on such information or other Content. In exchange for accessing and viewing the Video Programs and Content, you agree not to hold Refinitiv, its affiliates or any third party service provider liable for any possible claim for damages arising from any decision you make based on information or other Content made available to you through the Video Programs.
The Content and information in the Video Programs has been obtained from sources believed to be reliable, but Refinitiv makes no representation or warranty as to the accuracy, timeliness or completeness of the Content. Any opinion or recommendation expressed in the Video Programs is subject to change without notice. Refinitiv does not recommend, explicitly nor implicitly, nor suggest or recommend any investment strategy. Refinitiv disclaims all liability for any loss that may arise (whether direct, indirect, consequential, incidental, punitive or otherwise) from any use of the information in Video Programs. Refinitiv does not have regard to any individual’s, group of individuals’ or entity’s specific investment objectives, financial situation or circumstances. Refinitiv does not express any opinion on the future value of any security, currency or other investment instrument. You should seek expert financial and other advice regarding the appropriateness of the material discussed or recommended in the Video Programs and should note that investment values may fall, you may receive back less than originally invested and past performance is not necessarily reflective of future performance
Hi I’m Oliver from Refinitiv. Welcome to Data On The Data.
Activity in the US stock market is becoming increasingly polarized between retail and institutional investors and this could have a significant impact on index volatility over coming weeks.
Individual investors have been targeting two strategies in particular. Firstly, as we mentioned last week, they have focused on small cap stocks names which have been heavily shorted. GameStop may have been the headline maker, but this strategy of buying unloved names has been implemented across a broad market. We’ve seen spectacular outperformance of Refinitiv’s US Most Shorted Stock Index versus the S&P500 over the last 6 months.
Secondly, they have been implementing many of these strategies with options, where average volumes are now over double where they were a couple of years ago, with volumes dominated by the small sized positions of the retail investor.
However when we look at the data usage of our institutional client base, specifically the equity indices, we can see that these investors have been engaging at their lowest levels of the year, even though US equity markets have been touching their all-time highs. The number of users engaged with the Nasdaq 100 is at its low for the year for both asset managers and commercial banks. This is a pattern that is repeated across other US indices, such as the S&P500 and for other institutional users, such as investment banks.
But it's not just in the US, we can see a similar pattern in Europe where commercial bank users of the Eurostoxx 50 and FTSE100 are at the lows of the year, a pattern which is again repeated for asset managers and investment banks. While some of the explanation is a drop off in activity out of our Asian customers due to the New Year's celebrations, that doesn't explain the broad based pullback in other regions.
It does suggest the increasingly passive element of institutional investing is just running with the flow and that the emotions around the all-time highs are coming from the retail sector. But trouble could be brewing. US bond yields have been edging higher, and investors have been focusing on commodities and inflation. When we look at a measure of bond volatility called the MOVE Index and compare it with the equity volatility index called the VIX, we can see that bond volatility has diverged in recent sessions when compared to the VIX, which recently touched a one year low after the earlier effects of the GameStop short squeeze. Bond yields are flashing warning signs about risk assets just when institutional investors appear to be stepping back from the market. And that could mean that more stock market air pockets are ahead in both directions.
Thank you for watching Data On The Data. Don't forget to subscribe so you never miss an episode. See you next time.