Below is the opening paragraph of our Morning Lineup commentary this morning. To view the entire report, including the 3-page PDF that comes with our email commentary each morning, sign up for a 5-day free trial to our Premium or Institutional service now.
Snapshot: Global risk assets are just off their highs but the bids overnight were so furious, it’s almost hard to describe. The market seems to have reached the unanimous conclusion that Greece is dealt with after new proposals were submitted by the Greeks over the weekend ahead of a Eurogroup summit today at 7:00 PM CET (1:00 PM EST). The result was a surge in global equities, collapse in “risk free” bond prices, and slamming of the door tighter on spreads for all manner of credit. Prices are moving fast and are twitchy to headlines from European finance ministers who appear annoyed the markets are announcing success before they can. Overall, we can’t emphasize the following enough: expect intraday volatility all week. Markets have decided to trade off of Greece (much to our dismay). While we don’t think the outlook for US equity market values are at all dependent on Greece over even the medium term, in the short term you have two choices: accept the craps game that is Greek headline risk or just unplug and go take a walk. If you do feel a need for hedges, VIX is relatively cheap in absolute terms but expensive to hold as the curve remains steep. If you are interested in a hedge this week, consider VIXY $13-15 call spreads expiring July 17th for 42 cents, with a maximum payoff of $1.58. In our view, and given the performance of long volatility strategies in 2015, it probably makes more sense to simply bear it out, but this appears to us to be a decent way to hedge without breaking the bank or exposing yourself to too much roll down on the VIX curve.