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Volatility Bubble Due to Pop?

The bubble in the Chicago Board Options Exchange Volatility Index (VIX) of implied S&P volatility could be set to deflate as wild fluctuations in stock prices ease, but it’s too early to call an end to the violent price swings, Kevin Gardiner, head of global equity strategy at HSBC Bank, said in a research note.

“We are still not out of the woods: earnings have yet to trough, and there is surely more financial debris still to surface,” he added.

Last week’s US trade data, better than expected first-quarter earnings from the likes of Goldman Sachs and improving mortgage applications, all point to lower stock volatility ahead, the note said.

The VIX broke below the 40-point mark this week, having averaged around 50 points since the collapse of Lehman Brothers last September, which signals an easing to the rollercoaster stock moves that have accompanied the financial crisis.

“We are again nudging our notional portfolio a little further in a pro-cyclical, beta-bounce direction,” Gardiner said.

HSBC is overweight on continental Europe, but underweight on the US.

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