Volatility (UVXY): The Hangover After Beijing's Sugar High

By Juri von Randow · 9 October 2024 · Tuesday Target 41/52 2024

UVXY as a way to own fear itself while China's stimulus rally stalls, Treasury yields climb and a nervous election draws close.

The Sugar High Wears Off

Beijing promised, and the market believed it on the spot. A rally of roughly 30 percent carried Chinese equities from the cheapest thing on the screen to something close to fair value in a matter of days, and fair value is an awkward place to keep buying. The MSCI China index has clambered back to its long-run average multiple, so the easy part, the part where you get paid simply for showing up, is behind anyone arriving now.

Then the planners spoke. The National Development and Reform Commission held its briefing and served mood music to a crowd that wanted money: nothing sized, nothing funded, nothing with a date attached. I have watched this film before. Anyone who traded through 2015 remembers how a state-blessed melt-up became a state-managed collapse once the promises ran ahead of the cash.

Underneath the headlines the old problems sit where they were: a property sector still digging through its own rubble, earnings guidance pointing the wrong way, and a dollar strong enough to make every inflow dearer. The bull case rests on Chinese households turning an enormous savings pile into spending. I want to see the mechanism before I price the outcome. Without it this looks like a sugar high, and I know how those end.

Yields Gatecrash the Rate-Cut Party

While China took the headlines, the American bond market quietly rewrote the terms of everyone else's trade. Strong data keeps landing, the benchmark Treasury yield has pushed back above 4 percent, and the tidy assumption that the Fed would ease early and often now reads like wishful thinking. Equities had filed the soft landing under settled business. The file has been reopened.

Thursday's inflation report is the hinge. The options market has already worked this out; premiums have firmed in a way that says even a modest upside surprise in prices could knock the rally off its feet. Stack on top a presidential election only weeks away, a Middle East that refuses to settle, a war in Ukraine that grinds on, and Beijing's credibility gap, and the calm on the surface of the indices starts to look thin.

Politics adds its own fog. Kamala Harris used a long television interview to step out of the shadow of Bidenomics and left sceptical viewers with more questions than reassurance on the economy and on immigration. A Goldman Sachs survey finds supermarket shoppers more price-sensitive than at any point in Biden's term. Distancing yourself from economic pain while the receipts still sting is a hard act, and markets dislike a hard act this close to a vote.

A Volatility Play on Volatility

For an options trader the shift is in the subject matter. Instead of guessing which stock rises or falls, the question becomes whether the market's own nervousness is underpriced against the calendar in front of it. Several fuses run short at once: an inflation print, an election, a Chinese government that either writes cheques or watches its rally evaporate, and a bond market repricing the Fed. When that many things can break in the same fortnight, fear itself becomes the cleaner thing to own, and options on a volatility product let me express that with defined risk rather than a naked directional bet.

My attention goes to Thursday's number first, because it decides whether yields keep climbing or retreat. Then to whatever follows from Beijing; another vague briefing tells me the rally has no floor, a funded package tells me the opposite. Then to whether yields hold above that line or slip back under it. And to the polling as the weeks to the election run down.

I called the trade routine, and it is. Some readers will say a volatility play on a volatility product is bending the rules. I have been doing this long enough to know the rules were drafted by people who preferred calm markets to look like the natural state of things. Calm is the exception. It gets priced as the rule, and that gap is where I do my work.

• UVXY

China stimulus · long volatility · Fed rates