Financial markets have seen equity volatility go up and down rather violently over the past weeks. Trade War has been the major driver of greed and fear.
Since highs two weeks ago VIX is down from 20 to 12.5. Volatility is mean reverting and tends to overshoot in times of “panic”.
On the other hand, there is a natural floor for volatility. Even if the markets don’t move, there will be interest for protection. With earnings coming up around the corner and the rhetorics of Trade War still a possibility, volatility at these levels is starting to be priced relatively attractive.
VIX is down to first “natural floor” levels from where we have bounced off earlier this year.
Euro Stoxx 50 vol, V2X, is down to similar “natural floor” levels.
Despite the Asian volatility spilling over from China, Nikkei volatility index, VNKY, has come off substantially over the past 10 trading sessions.
Note how Euro Stoxx 50 volatility was trading on July 1st (green) and how it trades today (orange). The overall volatility curve has shifted lower and shorter term maturities have imploded relatively speaking.
Short term maturities are attractive if one believes we could be seeing short term moves.
Falling volatility over the past 2 weeks is valid for most equities but note for all assets. Note how the JPM global fx volatility index has popped over past days and is actually higher over the past weeks. Not overly surprising given the moves in GBP, Yuan, TRY.
The question is whether global FX volatility could spill over to equities (again)?
Source: charts by Bloomberg