As the market braces for potential volatility, the Cboe's VIX index, known as Wall Street's 'fear gauge,' is signaling increased investor anxiety. The VIX measures expected volatility in the S&P 500 over the next 30 days, and its rise indicates that investors are looking to safeguard their portfolios.
Factors contributing to this nervousness include the upcoming U.S. midterm elections, interest rate risks, and recent escalations in geopolitical tensions, particularly in the Middle East.
Nomura's Charlie McElligott noted that equity investors are now hedging against what he termed a 'negative risk trinity.' The demand for protective options is evident, with the VIX three-month call skew reaching the 91st percentile of its historical range, indicating that options are currently more expensive than 91% of the time in the past.
Luke Rahbari, CEO of Equity Armor Investments, anticipates increased volatility as year-end approaches, driven by shifting rate expectations and cross-asset pressures.
While the MOVE Index, which tracks Treasury market volatility, remains elevated, suggesting stress in the bond market, some analysts, like Zachary Griffiths from CreditSights, believe that overall market conditions are not yet under significant strain. He points out that both the MOVE Index and VIX are near their 10-year averages, and corporate credit spreads are historically tight.
However, James Ooi from Tiger Brokers suggests that volatility may decrease after the midterm elections, as political uncertainties diminish, typically leading to a 4% drop in the VIX in November