SPX® Index Vol Metrics Normalize Quickly Post Monday Jump

Weekly Macro Volatility Digest: August 12, 2024

Link to Report: Macro Volatility Digest

WHAT STANDS OUT:

• While equity and FX vols surged last week on the back of the carry trade unwind, volatilities in other asset classes (particularly rates and credit) remained relatively calm, suggesting last week’s sell-off was purely positioning-driven rather than macro fundamental in nature. As a result, the volatility spike – at least in the US markets – was short lived with the VIX^® index ending the week lower by 3 pts. Other SPX index risk metrics, including skew and correlation, have all normalized as well (see chart below). In contrast, Asia markets still remain on edge, with both NKY and USDJPY implied volatilities retracing only ~half of last week’s increase.
• What drove the VIX index to 60+ last Monday pre-market? Fears of contagion, the speed of the carry trade unwind, and lower pre-market liquidity all contributed. But at its core, it’s a reflection of the surge in realized volatility, with S&P futures down 4.5% pre-market (equating to a SPX realized vol of ~70). While the VIX index spot move far outpaced the increase in VIX futures, it’s not surprising given the underlying catalyst for the increase. Unlike covid, for example, which was both a liquidity event and a macro shock, what happened on Monday was purely a liquidity event (carry trade unwind) – there was no fundamental/macro reason underlying the move and therefore no reason to expect volatility to remain high once the deleveraging was over. Indeed, as the week went on, the VIX index normalized quickly.

^{Source: Cboe Global Markets}

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