- “Germany’s director at the European Central Bank has thrown his weight behind mass purchases of Spanish and Italian debt to prevent the disintegration of the euro, marking a crucial turning point in the eurozone debt crisis”. Jörg Asmussen, the powerful German member of the ECB’s executive board, said a currency can’t be stable if its future existence is in doubt. London Telegraph
- RBA Minutes:
- The inflation data for the June quarter were broadly in line with expectations, and confirmed that underlying inflation was around the bottom of the target.
- Inflation was forecast to increase a little as the effects of the earlier exchange rate appreciation continued to wane, and it would also temporarily be pushed higher by the introduction of the carbon price.
- Wed: US Existing Home Sales, BoC Governor Carney speaks, FOMC minutes, China HSBC Flash Mfg PMI
- Thurs: EU PMI, US Jobless Claims, US Markit Prelim PMI, New Home Sales,
- Fri: US DGO
- Mon: German IFO, Dallas Fed
Commentary & Links:
The S&P hit a new high for the year today, but there remains substantial uncertainty in the market. One gauge of that is the term premium for equity implied volatility. As the chart below shows, the 6m1m forward implied volatility premium over spot 1m implied volatility is at a 98th percentile reading when compared to data over the past 3 years. Market participants are paying over 11 vols more for volatility 6m forward when compared to spot – a premium of ~80%.
There are of course two ways this spread could revert to its median reading of 6. Either spot Vix jumps, or forward vol falls, or a combination of the two. Possible catalysts likely include either a positive or negative resolution to the US Fiscal Cliff, which will need to occur shortly after the election. Nevertheless, the large term premium, both absolute and relative to recent history, suggests good risk reward.