A few charts on volatility and credit as we await the G20 to really kick off. We have outlined our view going into the G20: the crowd is too fearful, too short and expect huge things. We claim the pain trade being a continuation of the bounce, risking to result in falling volatilities and shorts chasing markets higher.

Credit is not volatility, nor is volatility credit, but they have some similarities when it comes to pricing risk and events.

As we all know, credit has exploded to the upside over past weeks. We have covered this space for months and have pointed out several “dislocations”. Interesting to note here is that credit remains elevated (CDX, white) while VIX (orange) has seen some calmness start being priced in. The G20 is an event, but we doubt it will rock markets significantly. Credit seems rather rich here relatively speaking.

Below is the chart of European credit, iTraxx main (white), versus the Eurostoxx 50 volatility index, V2X. This space has moved in tandem well over past months. Note how credit remains elevated and the recent “dislocation” continuing. Credit surely looks to trade rich in Europe as well.

Yesterday we read in media that the VIX is pricing something else than equity markets, since VIX did not fall overly much on the Powell news. This shows only how little knowledge people really have when it comes to understanding volatility.

Digging deeper into the DNA of the VIX, namely looking at the VIX 1-month versus 6-month futures, shows stress has come off last sessions. The spread has continued to come down, just as it should trade when market is getting calmer and pricing less risk going forward.

After all, G20 is a known unknown, and should be priced accordingly.

Source: charts by Bloomberg