Options markets increasingly influence equity market behaviour

In our biweekly publication ‘Monitor' provides you with a structured overview of current capital market developments.

Current market commentary
Volatility in the bond market remains high in the face of high US inflation. The market is increasingly pricing in rate hikes and market participants are intensely debating whether high inflation is temporary or permanent. Meanwhile, many equity markets are marking one all-time high after another, supported by declining volatility that is pushing rule-based strategies more into equities. Another pillar of the equity rally is private investors, who are now again betting more heavily on rising share prices by means of options. The volume of traded options on individual US stocks recently exceeded the record set in January 2021 by 60%. Many market participants expect a year-end rally, as do we. However, the optimistic investor sentiment as well as the increased risk positioning now makes a technical setback more likely, especially since many options also expire at the end of the week with the monthly expiration. As many calls on tech stocks were bought, they could come under pressure in the short term.

Short-term outlook
This Friday marks the monthly options expiration, which could lead to increased volatility in stock markets. On 25 November, US stock markets are close for Thanksgiving.
Today, the Empire State Index (Nov.) for the US will be released. Retail sales (Oct.) and industrial production data (Oct.) for the US will follow on Tuesday. Inflation data (Oct.) for the UK will be released on Wednesday. The market is likely to look closely here as inflationary pressures on the Bank of England are already evident. In addition, housing construction data (Oct.) for the US will be released. The Philadelphia Fed Index (Nov.) will be published on Thursday. In the following week, the preliminary Markit Purchasing Managers' Indexes (Nov.) for Europe and the US as well as the Ifo Index for Germany will be published.