Chart of the Day

There are some signs that investors are concerned about an upcoming market correction. The VIX index of implied volatility for at-the-money options has continued to decline, but the SKEW index, which is based on deep out-of-the-money options, has jumped to its highest since before Covid. That implies investors are increasingly seeking protection against a steep fall in prices, although it hasn’t been matched by other indicators like a rise in the put/call ratio (see below).

Macro

The weekly EIA report showed crude inventories rose by 1.3 mn barrels last week and are now only 1.9% higher than their average at this time of year over 2017-19.

Nonetheless, higher than normal inventories continue to keep a lid on production.

The US oil refinery utilization rate was little changed last week at a relatively low level.

The main German and French business surveys both rose in May, with the French one leading the way and now above the pre-Covid level.

In Brazil, growth in foreign direct investment remains weak.

Markets

Like the rise in Skew, it could also be a concerning sign that a selection of assets that typify risk-off trades has risen in the past week, while risk-on assets have dropped back - not a good sign for relative positioning.

No one told small-cap investors though. After featuring the Russell’s underperformance as the Chart of the Day in the previous edition of the newsletter, the index naturally outperformed by a long shot yesterday.

Similarly, the CBOE US equity put/call ratio is still low at 0.44, compared to the long-run average of 0.62

The EVs have been rebounding.

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