What Does Cross Asset Volatility Tell Us?

1) OIL – Consensus is pretty bullish for Oil right now, which can be seen in the CFTC Non-Commercial Net positioning data.  Crude Oil has 240,964 long (bullish) contracts open in the latest data.  The 3 YR max was 390,627, so certainly more room for more bullishness, but getting closer to that recent historical max.  A lot of narrative is driving bullishness right now too.  Narratives fade, but the facts remain that when everyone is a buyer, local, short-term tops usually aren’t far away.  What else sticks out about oil?  Volatility.  OVX is the volatility tracker for Oil and it currently sits at an eye-watering 75.20!  Last fall, oil volatility was in the 50s.  For some context, this is as high as we’ve seen oil volatility since 2020.  Of course, the drop in the price of oil back then was pandemic-induced, so conditions today are much different.  However, it remains that capital tends to flow to wherever it is best treated, and that tends to be away from assets with high and rising volatility.  

2) RATES – The recent move in commodities (expecting higher inflation data?) and the US Dollar is pushing rates higher as well.  While none of the longer-dated Treasury yields are bullish in TREND yet, they are in the neutral zone.  What’s likely?  That these longer-dated rates fall soon.  Could they inch higher?  Yep.  The US 10YR is at 4.14% and 4.21% would not be a huge surprise.  The increasing expectation of rising inflation is moving the Fed Front Runner – 2YR Treasury – higher in the very short term here.  It is now above trend at 3.59% and could move as high as 3.65% before correcting to test that trend level at 3.53%.  That said, I’d be surprised to see it hit 3.65% before coming back toward trend since the inflation expectations really haven’t been rattled by the Iran situation.  The MOVE Index (bond volatility) is heading lower after testing resistance at 77.  That’s good.  Markets enjoy declining bond volatility.

3) USD – The US Dollar is now 4 days above trend, making this a bullish breakout with the 100 level as the real resistance level it needs to get through.  Until then, we could see the Dollar with this sideways chop that’s been in place now since last summer.  Right now, it would not be surprising to see the Dollar Index (DXY) come down to test 98.  But, the bullish (upward bias) in the Dollar remains.  That could work well for stocks, oil, and Bitcoin in that they are all positively correlated with the Dollar now.