VIX Index Spikes Lower as Risk Appetite Crushes Volatility

VIX INDEX ‘FEAR-GAUGE’ CLOSES BELOW 30 FOR FIFTH TIME THIS MONTH; RELENTLESS RISK RALLY STEERS CROSS-ASSET VOLATILITY LOWER

• VIX Index plunged back below 30 while the S&P 500 surged despite skepticism over a potential coronavirus vaccine
• Cross-asset volatility gets crushed as traders capitulate to the risk rally and safe-haven selloff
• The US Dollar could stay under pressure and crude oil might extend its recovery if market sentiment remains unfazed

The VIX Index, or ‘fear-gauge,’ pivoted toward months as trader risk appetite continues to flourish and expected stock market volatility ebbs further. With global equities on a tear higher since bottoming mid-March, led by a 40% surge in the Nasdaq, investor sentiment has improved markedly and looks like a main contributor to the 50-point decline in the VIX from levels often seen during financial crises.

As central bank liquidity gushes, and the market turns increasingly optimistic with coronavirus lockdown reopening efforts underway, the VIX Index might remain under pressure. This is particularly the case with coronavirus vaccine hope showing potential to exacerbate the risk-on mood and downside notched by cross-asset volatility benchmarks.

VIX INDEX PRICE CHART: DAILY TIME FRAME (DECEMBER 2019 TO MAY 2020)

Chart created by @RichDvorakFX with TradingView

Despite spot VIX plunging to the 28-mark, and month-to-date lows, the volatility squeeze may soon subside. This is considering VIX Index futures across the term structure have stayed relatively anchored to the 30-handle. Also, the VIX might find technical support offered by a confluence of its 200-day exponential moving average and 78.6% Fibonacci retracement level of the year-to-date trading range.

VIX INDEX, CROSS-ASSET VOLATILITY REMAIN UNDER PRESSURE AS STOCKS & CRUDE OIL CONTINUE CLIMBING

Chart created by @RichDvorakFX with TradingView

Several other cross-asset volatility benchmarks have experienced downward pressure alongside the VIX. For instance, crude oil volatility (OVX) has completely reversed the explosion after commodity prices turned negative last month as demand picks back up with economic activity. US Dollar dominance appears to have subsided as well and likely helped facilitate the retracement lower in expected currency volatility (FXVIX).

Nevertheless, while Chinese stocks drop in response to the Senate oversight bill just passed, there is the outstanding threat that US-China trade tension escalates once more. The VIX Index, and expected volatility for emerging market equities (VXEEM), could correspondingly rip back higher. This might bode ill for pro-risk assets, like the S&P 500 or crude oil, while perhaps providing a boost to safe-haven assets, such as the US Dollar.

Keep Reading – US Dollar Outlook: DXY Hammered Ahead of FOMC Minutes

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight