A confluence of factors are raising anxiety levels among investors, and it is being expressed in heightened volatility. The S&P 500 was turned back yesterday from the key 1945 level, and global equities are falling today. The over-production of oil is set to continue to Saudi Arabia denies intentions to cut output, and the Iranians scoffed at suggestions of freezing output. API reported another large rise in US crude stocks, which points to upside risks on the consensus estimate for 2.4 mln barrel build in today’s official Department of Defense report.

Sterling’s slide remains the continuing feature in the foreign exchange market. Brexit fears dominate. It has convincingly broken the $1.40 level and is trading near $1.3915. It has lost about 3.4% this week already. In terms of economic impact, sterling’s trade-weighted performance is key.The Bank of England, effective exchange rate measure, has fallen 8.7%, of which 5.4% has been recorded this month alone.  

UK officials are likely more concerned about the pace of the move than the direction. The pass-through to inflation may take several months provided it is sustained. To the extent that there is a trade advantage, it likely takes even longer to be seen.  

Not only is sterling being sold in the spot and forward market, but some investors seek protection in options market. Implied volatility is rising, which suggest puts being bought rather the calls being sold. Three-month implied volatility is near 11.5% today, up from 8.7% at the end of last year and 8.9% at the end of January.  Last April, three-month implied volatility spiked to 12.5%. 

In the options market, puts and calls equidistant from the forward strike should be similarly valued. To the extent they are not reflects a market bias. Three-month sterling calls are selling at a 1.5% discount to puts (risk-reversal). This is the biggest discount since last May.  Last April the discount was near 3%.  

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