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I expect a volatile 2008
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Stock market volatility returned with a vengeance in 2007 and is not going away any time soon. The rise in volatility was reflected in the kind of year financial markets had, marked by big market swings due to the worsening global credit environment.I believe that the markets have shifted to a higher volatility regime.
I agree with analysts who say volatility may remain high in 2008, most analysts say, amid expectations that credit losses concentrated in lower-quality subprime mortgages will broaden to affect many borrowers once thought good credit risks, as well as other types of debt, including credit card and auto loans.
Uncertainty regarding the Federal Reserve's interest rate policy, along with unstable oil prices and a slowdown in the housing sector, could also be drivers of volatility.Corporate fundamentals within the current economic environment point to the likelihood that market volatility will trend at a higher baseline level in 2008 than it had prior years.
Deutsche Bank's equity derivatives strategy group, in a December 14 note to clients, predicted volatility is here to stay.They believe volatility will remain high in 2008 as the (liquidity) crisis drags on and the macro drivers of volatility, brought on by the recent Fed moves and credit tightening, continue to play out.
One reason volatility was so low through the last five years was because hedge funds piled into selling strategies that primarily involved Standard & Poor's 500 .SPX index puts, originally.
They also sold market volatility at lower levels through variance swaps, a product that expresses a play on actual volatility.But during the last two subprime meltdowns of 2007, these hedge funds had to unwind their short positions and as a result, much of the trading pressure responsible for lower volatility has been removed.
More volatility is not necessarily a harbinger of lower stock prices, analysts said. For example, stocks were very volatile during the bull market in the late 1990s.
Higher volatility also provides opportunities for strategic traders. Investors can now trade volatility products and therefore, it is possible to make money on volatility, regardless of stock market direction.
Futures and options on the Chicago Board Options Exchange Volatility Index .VIX, or VIX, had a banner year as investors sought out those instruments to hedge their portfolios or speculate on adverse and unexpected outcomes.
As the new year draws near, the VIX, Wall Street's main meter of investor fear, is near halfway of the peak reading it hit during the stock selling climax in August.
The indicator, which reflects investors' expectations of near-term volatility conveyed by S&P 500 option prices, is hovering around 20.
Volatility has historically risen after a steep U.S. yield curve inversion, in which short-term interest rates are higher than those for longer-dated instruments.
The Federal Reserve's benchmark federal funds rate, at 4.25 percent, is now above U.S. Treasury yields out to the 10-year maturity.
Going back to 1982, extreme peaks in yield curve inversion were often followed by higher equity volatility over the following 24 months, according to the bank's research.
For this week, I expect more bad news to come from banks.I specially stay away from Merrill Lynch although it has an attractive price.The coming investor court case might be a headache for them.Merrill news might affect financial industry this week. I expect financials to be the major drag in first half of the year,stars of the second half 2008. |
| Tarih
: 31.12.2007 |
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Copyright
© 2006 Mert TOKER All Rights Reserved. |
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