US equity markets have somewhat decoupled from global risk lately. The SPX continues moving in relatively tight ranges. Since the VIX spike in January volatility has been decreasing and has several times traded down to the “natural floor” level.

One of the problems among volatility traders is that they tend to price current moves and not external possible events. You can’t really blame them, I mean why pay more for something that currently isn’t worth more. This has some logic to it for people trading volatility as an asset (dynamic hedging).

This creates opportunities for people using options for hedging, speculation and risk management. Volatility as such can be cheap or expensive but at any given time it can provide skewed opportunities and provide interesting protection of your portfolio.

Below chart shows the JPM Global FX volatility index (white) versus VIX (orange) YTD.  The gap has recently widened to a rather extreme level. We all know about the Emerging Markets FX with Turkey as the main mover. One gap doesn’t mean there is huge correlations but it would be naive to dismiss this chart.

Dismissing the chart would be even more stupid if you look at it over several years. All major spikes in FX vol have been accompanied with rising VIX levels.

SPX realized volatility at the moment isn’t justifying higher VIX levels, but should things heat up, the premium paid for optionality could prove to be cheap at current levels.

Meanwhile Dr Copper continues to trade lower and is currently breaking down hard.

Currently not many seem to care about the decoupling of VIX versus global FX vol, nor the fact copper continues lower, but what if these two are the canaries in the coalmine?

Source: charts by Bloomberg