Sun

Mr. SUN Yu (Elic) VP Client Relations China – Manages Chinese business relations for the brand.
Elic provides market commentary for well-known media in China, including: People.cn, Financial News and China Finance Information Network. Elic serves as a special guest analyst on the CCTV Financial Channel to provide real-time analysis on the foreign exchange market.

It has been a wild couple of weeks for the global financial markets, with investor anxiety fluctuating with market volatility, between multi-decade lows and yearly highs. So, what does the CBOE VIX Volatility Index tell us?

As a measure of expected volatility over the next 30 days, the VIX  is commonly used to track investor appetite in U.S. stocks. The indicator, commonly known as Wall Street’s favourite “fear index,” is tied to movement in the S&P 500 Index.

When the S&P 500 declines, the VIX usually rises.

And when the S&P 500 rises, the volatility gauge normally falls.

 

VIX hits 24 year lows

It therefore comes as no surprise that the VIX reached 24-year lows on May 8, the same day the S&P 500 closed near record highs. The volatility gauge ended the day at 9.70, which is less than half of its historic mean.[1]

It wouldn’t take long for U.S. stocks to reach new records, as upbeat corporate earnings continued to stoke demand for riskier assets. Despite reaching record highs, stocks had traded in a tepid range throughout the month, a sign investors were slowly moving away from the markets ahead of the summer.[2]

By 17 May, all that changed in a big way.

 

VIX Spikes Again

 On that day, a series of political events rocked Capitol Hill in Washington, thus triggering the biggest selloff of U.S. equites in at least eight months.

The S&P 500 Index plunged 1.8%, the Dow Jones Industrial Average sold off nearly 400 points and the Nasdaq experienced its biggest one-day drop in almost a year.

As a result, the VIX spiked more than 46% to reach its highest level in over a month.

The massive reversal in the VIX is a clear sign that the so-called Trump rally is running out of steam. After months of tremendous growth, Wall Street is struggling for new highs as the Republican administration continues to face resistance in implementing its policies.

The market crash last Wednesday was stoked by a fresh political crisis that has been described as the toughest Trump has ever faced. It all began with a memo that surfaced on Tuesday from then-FBI director James Comey. In the memo, Comey alleges that Trump attempted to close an investigation involving his former national security advisor Michael Flynn. If true, Trump has engaged in obstruction of justice, which is an impeachable offense.

 

The VIX is back to trading in the mid-15 region, and could be poised for bigger gains as political tumult spreads throughout the financial markets.

 

[1] Clark Schultz (May 8, 2017). “VIX falls to 24-year low.” Seeking Alpha.

[2] Sam Bourgi (May 10, 2017). “S&P 50 Futures Reach All-Time High as Markets React to Comey Firing.” Economic Calendar.

 

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