You can always tell when the crowd gets long the VIX and ends up on the wrong side of the trade. “The VIX is broken!” becomes an oft-repeated refrain, as does “The markets are rigged!” and the usual list of exhortations from those who are in denial. The current line of thinking is that the world must be much more dangerous, risky and uncertain as a result of a Trump victory, yet the VIX is actually down 31.4% since the election – ipso facto the VIX is broken.
While I have more than a small soft spot in my heart for the VIX, I will be the first to point that taking an Americentric, equity-centric view of the investment landscape is dangerous and naïve. More often than not, the issues that end up having a strong influence on the VIX are born on foreign soil and/or in other asset classes. Just look at the recent history in China, Greece, Italy, currencies and commodities to name a few.
When it comes to looking at implied volatility indices as a risk proxy, I prefer to survey the landscape across asset classes, geographies and sectors, which is why I have developed tools such as a proprietary Macro Risk Index (more on this shortly) that look at risk across asset classes, geographies and sectors.
In the graphic below, I have isolated a handful of volatility indices that cut across asset classes and geographies to show how these have moved in the eight days following the election. Note that CBOE/CBOT 10-year US Treasury Note Volatility and the CBOE Euro Currency Volatility have been trending steadily higher since the election as uncertainty related to the future of inflation and interest rates in the U.S. has risen, while the relationship that the Trump Administration will have with our NATO allies and the European Union is also somewhat murkier.
CBOE Gold Volatitity initially moved sharply higher following the election, but has since receded, as gold prices fell swiftly after the election, but have since stabilized. Meanwhile, emerging markets saw dramatic selling immediately following the election, but have bounced during the course of the past week as fears and CBOE Emerging Markets Etf Volitlity have subsided. Last but not least, the moves in crude oil andmCBOE Crude Oil Volatility have been the least remarkable of the group.
In aggregate, the picture is a mixed one in terms of implied volatility, risk and uncertainty. As is often the case, risk has become elevated in certain asset classes, such as Treasuries and the euro. In other areas, such as U.S. equities – and their VIXian barometer – there are winners and losers, with the result that a net bullish outlook has moved equity implied volatility lower. This is not to say that a Trump Administration – whose cabinet members and policy priorities are largely unknown at this juncture – will not increase risk in some areas. More risk is certainly on the horizon and if history is any guide, an Americentric, equity-centric view of the investment world is likely to be slow in identifying those risks.
Disclosure(s): the CBOE is an advertiser on VIX and More