US DOLLAR & VIX INDEX BLEEDING LOWER AS STOCKS, GOLD & CRUDE OIL SOAR
- US Dollar turns negative year-to-date as safe-haven demand disappears
- VIX Index remains under pressure fueled by a relentless bid under stocks
- Crude oil prices surmount a critical technical barrier on demand recovery
Markets are having a field day today with numerous assets attempting to break out from their respective trading ranges recently developed. The US Dollar is disintegrating broadly and sinking the DXY Index – a basket of major currency pairs heavily weighted toward EUR/USD price action – back into negative territory on the year. Ongoing US Dollar devaluation has helped gold performance shine exceptionally bright over the last few months as the precious metal notches another fresh multi-year high.
Meanwhile, as the tsunami of stimulus from governments and central banks drowns the market in liquidity, investor risk appetite has grown abundant. This has largely facilitated a swift v-shape recovery by stocks and major equity indices, like the S&P 500, which now trades in the green year-to-date. Similarly, crude oil price action has staged an impressive rebound as business activity and global GDP growth outlook bounce back subsequent to the coronavirus lockdown.
CROSS-ASSET VOLATILITY BENCHMARKS SLUMP TOWARD PRE-PANDEMIC LEVELS
Chart created by @RichDvorakFX with TradingView
Aggressive shifts across the market sentiment spectrum throughout the year – from complacency early February, to extreme fear during March, and to the current state of euphoria – can be illustrated by tracking cross-asset volatility benchmarks. For example, the popular S&P 500 VIX Index, which is often referred to as the ‘fear-gauge’ on Wall Street, surged earlier this year to levels last seen amid the global financial crisis.
The VIX Index has since deflated, however, and reversed nearly all of its meteoric rise as investor confidence improves while the economy recovers from its sharpest downturn in modern history. Less-known yet equally insightful measures of market volatility, like the EVZ Index or VXHYG Index, mirror the VIX Index and depict the same narrative. EVZ and VXHYG indicate expected volatility, or perceived uncertainty, surrounding the Euro and high-yield corporate debt over the next 30-days, respectively.
VIX INDEX PRICE CHART WITH S&P 500 OVERLAID: DAILY TIME FRAME (DEC 2019 TO JUL 2020)
Chart created by @RichDvorakFX with TradingView
Seeing that cross-asset volatility benchmarks generally maintain a strong inverse relationship with risk assets, like stocks, it is unsurprising that the S&P 500 keeps marching higher with the VIX Index bleeding lower. Congruently, it is worth mentioning that stocks bottomed shortly after the VIX topped out earlier this year.
Despite the S&P 500 officially reclaiming its January opening level, however, the VIX ‘fear-gauge’ still seems elevated on a relative basis. Perhaps this highlights lingering investor uncertainty and skepticism toward the stock market rally driven predominantly by expanding price-to-earnings multiples in the midst of more than 30-million Americans filing for unemployment insurance last week.
That said, if the VIX Index stays fairly buoyant, it might suggest the S&P 500 faces an uphill battle as equity investors continue seeking downside protection. Alternatively, if stock market euphoria prevails, copious amounts liquidity on the sidelines, in addition to hopes for another round of fiscal stimulus from the US government, could keep steering stocks higher and exerting downward pressure on the VIX in turn.
-- Written by Rich Dvorak, Analyst for DailyFX.com
Connect with @RichDvorakFX on Twitter for real-time market insight
