Weekly Commentary on Future Asset Values

Updated with data through September 4, 2014

Latest Report

September 6, 2014 [PDF]


Commentary

Please note the addition of the inflation MPD information to the spark table form of the report this week.

One year risk-neutral inflation expectations are biased toward lower rates and tail risks for 10-year rates remain low. Most bank stock MPDs exhibit more bias toward rising prices than they have in the past 4 years. Grain prices fell, cattle prices rose, and options activity on exchange rates was brisk.

Inflation
The median (risk-neutral) expected inflation rate for all expiries, as derived from caps and floors on the CPI, declined at the two and five year expiries. Market based uncertainty (MPD standard deviation) related to the median expectation is currently very low indicating high conviction about the expectation. Note narrowing of the middle of the MPDs in the graphs below.

Risk neutral bias is for lower inflation rates over the shorter term as measured by MPD skew. Over the next five years, MPD skew is close to zero indicating no bias toward higher or lower inflation rates.

Chart 1

Large chart

 

Interest Rates
The risk neutral bias for near-term changes in the 10-year treasury price remains close to zero indicating relatively little expectation for rate changes in the near term. This is measured by MPD skew. Tail risks for rate changes as measured by MPD standard deviation are relatively low.

Chart 2

Large chart

Banks & Insurance Companies
The S&P 500 was relatively unchanged over the past two weeks rising 0.3%. The average bank and insurance company in our universe of companies outpaced the broader market rising 1.3% and 0.7% respectively. Across the universe of bank and insurance company equities, tail risks as measured by MPD standard deviations remain low.

MPD skews are exhibiting more upside bias than they have over the past four years. In the graph below, we present MPD skews adjusted for their average values and standard deviations since 2010. That is, the graph shows Z-scores for bank skews. The adjustment allows us to account for the differing liquidity for the various firms as well as the fact that equity MPDs tend to be negatively skewed.

Chart 3

Large chart

The graph indicates that, along with the general increase in share prices, risk neutral expectations are more biased toward upside price moves than they have been on average since 2010. Only C and USB have negative Z-scores among banks. The upward bias in skew is less pervasive among insurance companies and there are clear differences in the magnitudes across the companies.

Other Commodity Markets
Spot prices were lower again across the range of physical commodities we track. Trading generally fell from two weeks ago. Tail risks as measured by MPD standard deviations were mixed. Across the set of exchange rate markets we follow, MPD standard deviations rose.

Additional Details:

  • Trading in options on oil futures was light in both WTI and Brent crude markets. Traders had relatively more interest in trading options on WTI than Brent in the past two weeks which is a change from recent reports. MPD skews continue to indicate a bias toward lower prices.
  • Trading was active again last week in all three currency markets we follow. MPD standard deviations, though at low levels, moved up indicating a change toward higher tail risk.
  • Spot prices for corn, soybeans, and wheat futures dropped sharply. Options trading was relatively light and tail risks changes as measured by MPD standard deviations were mixed. MPD standard deviations remain near recent low levels.
  • In contrast to the grain markets, spot prices for cattle futures remain near their recent highs. Tail risks have dropped from high levels over the past six weeks as has options activity even as prices rebounded.

Chart 4

Large chart


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Narayana Kocherlakota