BUY VOLATILITY

Vol is too low here. Suppressed to a level not seen since last October. This is where it averaged through most of the 3% range the S&P enjoyed through H1 last year.

This was however thanks to a combination of an easing of pressure points (data, China, commods) and renewed dovishness from CB’s.

We argue that this is far too complacent. For the foreseeable future global CB’s have exhausted their arsenal.

The US isn’t fully pricing another rate hike until Jan next year which does not tally at all with recent inflation and jobs data.

The ECB has raised the bar for another depo rate cut/round of easing materially with it’s last course of action.

I would argue that the Fed has materially increased the chance of a policy error. At best the FED has lost credibility after raising into a ‘transitory’ low inflation environment in Dec and refraining due to unsustainable inflation pick up 3 months later.

Outside of the US there are multiple catalysts over the rest of the year that will generate some volatility; Brexit vote, US elections, ongoing issues in China, earning season.

We would be buying Vol here as we feel it is currently artificially suppressed.

Buy VXX US below $17.60. We are looking for 30% upside with a PT of $23.15