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November 12, 2019
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VIX Record Short Signals Market Complacency, Raising Risks of a VIX Blowout

VIX Analysis & News

  • US Equities Soar to Record Highs on Central Bank Liquidity and Easing Trade Tensions
  • Speculators Hold Largest VIX Short on Record

Global equities have continued to push increased in latest weeks with US shares hitting contemporary file highs, whereas yesterday noticed European indices such because the DAX rising to its finest degree for the reason that starting of 2018. The principal narrative that has been fed to market individuals has centered across the discount in commerce uncertainty with the US and China seeking to log off the part 1 settlement in mid-November. Reports this morning by way of the FT additionally famous that the White House could contemplate rolling again levies on $112bln of Chinese imports as a concession to seal a partial deal. As such, whereas this has been a consider boosting international sentiment and thus lifting fairness markets, one other key contribution to the upside in fairness markets has been contemporary liquidity stemming from central banks rising their steadiness sheets, most notably the Fed and the ECB.

As a consequence, indicators of market complacency have been rising with the volatility index (VIX) persevering with to go decrease, whereas CFTC positioning information exhibits that speculators maintain a file brief within the VIX. Alongside this, the CNN Fear Greed Index is pointing to excessive greed.

Central Bank’s Growing Their Balance Sheet

In mid-October the Fed introduced that it will increase the steadiness by shopping for $60bln a month in Treasury payments, so as to enhance reserves held by banks. The NY Fed had later provided to offer extra reduction to repo markets by providing short-term each day operations of $75bln/day earlier than elevating this to $120bln/day. In September, the ECB introduced that they’d restart QE in November with 20bln/month of asset purchases.

VIX Record Short Signals Market Complacency, Raising Risks of a VIX Blowout

Over the previous month fairness markets have benefitted from subdued volatility with the VIX falling over 26% from the October excessive of 20 to 14.65. In flip, the S&P 500 has gained over 6% reaching an all-time excessive of 3085. However, with speculators holding a file brief within the VIX, questions will probably be raised as as to whether the market is starting to indicate indicators of complacency, probably leaving fairness markets weak to a VIX blowout.

Positioning is at extremes on each outright internet shorts (188okay) and on an open curiosity adjusted foundation (41.5%). Although, with that stated, dangers of a VIX blowout, like that seen in February 2018 could also be considerably misplaced, provided that open curiosity is relatively decrease at 453okay from 650okay again in early 2018. As it stands, threat sentiment appears set to stay buoyed within the brief time period as international uncertainty eases.

Record Short Positioning within the VIX

VIX Record Short Signals Market Complacency, Raising Risks of a VIX Blowout

— Written by Justin McQueen, Market Analyst

To contact Justin, e mail him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

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