Markets in Limbo as Volatility Gyrates: VIX, EVZ, VXEEM, OVX
CROSS-ASSET VOLATILITY REPORT: MARKETS SEARCH FOR DIRECTION AS VIX INDEX, EVZ, VXEEM & OVX OSCILLATE
- Market sentiment hesitates as traders grow weary about fiscal stimulus and trade tensions
- Popular cross-asset volatility benchmarks like the VIX Index remain broadly suppressed
- EM equities and VXEEM could highlight potential changes in appetite for risk
Investor risk appetite appears to be wavering as global markets trade broadly mixed. This largely comes on the back of a fiscal stimulus stalemate enduring in US congress and a notable escalation in Sino-American trade war tension. Not to mention, coronavirus concerns still linger due to building evidence of a worldwide second wave.
That said, most benchmarks of cross-asset volatility have drifted lower over recent months and weeks. Perhaps an ongoing volatility cycle normalization after the blow-up this past spring largely explains this, which a seasonal summer lull in market activity could be exacerbating. Thus it seems that complacency is likely on the rise as investors continue looking past several notable fundamental headwinds.
CHART OF EXPECTED VOLATILITY FOR S&P 500 (VIX), EURO (EVX), EMERGING MARKETS (VXEEM), CRUDE OIL (OVX)
President Trump signed executive orders over the weekend aimed at extending unemployment benefits and foreclosure protections while also moving to temporarily waive student loan interest payments and defer payroll taxes. Yet, the unilateral action by Trump may face several legal hurdles, and further fuels uncertainty surrounding congressional gridlock over fiscal stimulus talks, which could weigh notably on the S&P 500 VIX Index. A sharp rise in the VIX ‘fear-gauge’ could signal that investor uncertainty is climbing with demand for S&P 500 downside protection.
Also, US-China tensions ramped notably late last week. This follows the Trump administration seeking to ban Chinese tech companies like TikTok and WeChat from operating in the United States due to national security concerns. Further, sanctions were placed on Hong Kong leader Carrie Lam after the country’s democratic election was delayed. It appears that this is putting pressure on emerging market equities as indicated by a spike in the VXEEM Index and modest uptick in expected crude oil volatility.
Implied volatility for the Euro has started to edge back lower after an advance late last month that corresponded with a US Dollar relief bounce. This suggests potential for EUR/USD price action to remain relatively supported as demand for safe-haven currencies, like the US Dollar, keeps fading. US Dollar weakness may linger in turn, which may provide a positive tailwind to risk assets such as the S&P 500 Index, emerging market stocks, and crude oil. Consequently, in light of these conflicting fundamental drivers that loom over markets, it could be prudent to consider range trading strategies given the macroeconomic backdrop.
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