Morning Notes — Lower Volatility Ahead

A fifth US coronavirus relief package will be in focus this week and we may begin to see details on the GOP proposal later today. Media reports suggest the $600/week of additional federal unemployment benefits will be cut down to ~$200-400 with some form of ‘back-to-work’ bonus offered as an incentive. Another round of stimulus checks also sounds likely but fewer people will be eligible. The final round of $600 federal unemployment benefits will be sent on 7/25 and both sides say they want the bill done by early August. Politics shouldn’t be a problem and the ‘fiscal cliff’ looks like it will be addressed. There are other things to consider such as the ending of the moratorium on mortgage defaults, rental delinquencies and PPP lending program. State finances are also not addressed in the current package. Again, I don’t think politics will be a big problem and these other issues will likely be addressed. I know what you’re thinking…these are emergency measures and probably insufficient in dealing with prolonged challenges related to reduced mobility if current conditions persist for another year or more. Under those circumstances, it’s difficult to imagine fiscal policy not eventually turning tight.

Positioning: Despite the recent rally equity positioning in quantitative strategies (Hedge Fund Beta, CTAs and Volatility Targeting) remains well below average. The reason has mostly been elevated levels of volatility, but the VIX volatility Index finally broke below its 200-day moving average on Friday and could decline further as we move further into summer. Light equity positioning and elevated bearish sentiment continue to keep the balance of risks aimed higher.