Gold Volatility Surges Higher on Upside Call Demand

Macro Volatility Digest: April 1, 2024

Cross-Asset Volatility: Implied volatilities fell across asset classes last week in a week in a holiday-shortened week, with the notable exception of gold. GLD 1M implied vol jumped over 2 pts to 13.4% as gold prices surged to a new all-time high. GLD skew inverted further, with 1M 25-delta call now trading almost 3 vols over the 25-delta put. The extreme bullishness in gold, insofar as it reflects optimism over inflation and Fed policy, contrasts with what we're seeing in the rates market where expectations of Fed easing has remained largely stable over the past month (when the gold rally kicked off) and US 10Y real yield has been relatively unch'd. On a cross-asset percentile basis (1-year lookback), gold stands out as the only asset class trading with elevated levels of implied volatility (73rd percentile high) while almost everything else is near a 1-year low (see Exhibit 1).

Exhibit 1: Cross-Asset Implied Volatility (1Y Percentile)

^{Source: Cboe}

Equity Volatility: Implied vols declined across the board, led by China. FXI 1M implied volatility has gone a 1-year high of 32.8% in mid-Feb to a 1-year low of 24.2% currently as the Chinese equity market stabilized, with 1M realized volatility falling has also declined notably, with the MSCI EAFE index volatility (as measured by the VXMXEA Index) dropping to a 4-year low of 11.3% last week (see Exhibit 2). Cboe recently launched 3 new index options with MSCI (MSCI ACWI, World, and USA). For more details, please see here.

Exhibit 2: MSCI EAFE Index Volatility Falls to 4Y Low

^{Source: Cboe}

Skew: SPX^® skew remains historically flat on the back of tepid demand for hedges and elevated upside call buying. Interestingly, while demand for vanilla portfolio hedges remains low, interest in tail hedging has stayed extremely high as evidenced in the elevated VIX^® call volumes and skew. VIX calls are averaging ~513k contracts a day in 2024, up 2% from last year and nearing the record high of 530k ADV set in 2017.

Term Structure: While SPX front-end vols declined last week, longer dated vols actually increased, leading to a meaningful steepening in the term structure. The SPX 1Y-1M vol spread widened from 4.8% to 5.1% (83^rd percentile high).

Correlation & Dispersion: As outlined last week, we expect implied dispersion to remain high in the coming weeks as we approach Q1 earnings season. The DSPX^SM index gained marginally to 27.0% while implied correlation fell. S&P 1M top 50 implied correlation, as measured by the COR1M index, declined to near a record low of 9.0% last week, approaching levels last seen in 2017 (when the VIX was at 9). See Exhibit 3.

Exhibit 3: SPX 1M Implied Correlation Nears Record Low

^{Source: Cboe}

Cross-Asset Volatility Monitor

^{Source: Cboe}

Cross-Asset Volatility Snapshot (10Y Lookback)

^{Source: Cboe}

Cross-Asset Correlation Matrix (1M)

^{Source: Cboe}

Cross-Asset Correlation Analysis

^{Source: Cboe}

Macro Equity Volatility

^{Source: Cboe}

VIX Index Volatility

^{Source: Cboe}

US Index Volatility

^{Source: Cboe}

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