Volatility Breakout Threatens Risk Assets


VOLATILITY SHOCKWAVE LOOMS WITH VIX ON THE RISE

  • The VIX volatility index appears to have printed a topside breakout and risks climbing higher as market uncertainty reemerges
  • US equity volatility could spill over to other asset classes like forex, oil and emerging markets
  • Sharpen your skills as a trader with this free educational guide on Building Confidence in Trading

Volatility could be on its way to a market near you judging by the recent jump in the VIX Index. The VIX Index, which is Cboe’s measure of expected 30-day volatility on the US stock market, now trades above 14.0 and threatens to reverse the post-G20 summit collapse in volatility we highlighted earlier this month. This move to the upside in volatility could indicate turbulence ahead for risk assets like stocks and oil as market uncertainty resurfaces.

VIX INDEX PRICE CHART: DAILY TIME FRAME (SEPTEMBER 18, 2017 TO JULY 18, 2019)

VIX Index Price Chart

The VIX Index has been on a slow and steady ascent with a series of higher lows since the fear-gauge printed a record-setting bottom back in late 2017. This prevailing uptrend now looks to provide the VIX Index with technical support around the 12.50 level over the near term.

VIX INDEX PRICE CHART: 4-HOUR TIME FRAME (APRIL 16, 2019 TO JULY 18, 2019)

VIX Index Price Chart Technical Analysis

Zooming in on a closer time frame, the VIX Index’s breakout above downtrend resistance is more observable with prices topping the bearish trendline from the falling wedge pattern formed since May which I highlighted on twitter yesterday. If the latest bullish move is confirmed and holds above the 78.6% Fibonacci retracement of the leg higher from April 17 to May 09 – which looks to provide another level of technical support over the short term – a scenario of volatility skyrocketing higher seems more likely than not.

VIX INDEX PRICE CHART OVERLAID WITH GOLD VOLATILITY, OIL VOLATILITY, EMERGING MARKETS VOLATILITY, CURRENCY VOLATILITY & US 10YR TREASURY VOLATILITY: DAILY TIME FRAME (AUGUST 01, 2018 TO JULY 18, 2019)

VIX and Cross Asset Volatiltiy Price Chart OVX GVZ VXEEM TYVIX FXVIX

Also, if the VIX Index continues to push higher, it risks dragging other volatility metrics for asset classes like oil, gold, currencies and emerging markets higher as well. Gold price volatility (GVZ), which is positively correlated to spot gold, has already taken off amid plummeting yields and surging safe-haven demand as commodity traders flock to the precious metal in response to uncertainties surrounding the US China trade war, slowing global growth and monetary policy.

Seeing that volatility generally begets more volatility, it is unsurprising that volatility gauges like oil price volatility (OVX) and emerging markets volatility (VXEEM) have also shown signs of turning higher. Given the largely inverse relationship between volatility and risk assets, the rise in volatility metrics could pose major headwinds to upside in oil prices and emerging markets if sustained.

That said, the July FOMC meeting and the Federal Reserve’s decision to cut rates by either 25 basis points or 50 basis points later this month will likely serve as the catalyst that sparks the next move in volatility – whether it be higher or lower. The VIX Index and other volatility measures could quickly plunge back down if the Fed capitulates to the market’s lofty rate cut bets. On the other hand, a less aggressive move to ease monetary policy could disappoint investors which would likely send volatility surging and risk assets swooning.

— Written by Rich Dvorak, Junior Analyst for DailyFX.com

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





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