As guarded as the reception has been to Wall Street’s new fear gauge, the one-day VIX does appear to offer an interesting glimpse into a potential shift in the psychology of investors.
(Bloomberg) — As guarded as the reception has been to Wall Street’s new fear gauge, the one-day VIX does appear to offer an interesting glimpse into a potential shift in the psychology of investors.
Namely, diminishing anxiety over macroeconomic events such as inflation data and Federal Open Market Committee’s policy meetings, which previously had been big instigators of turbulence. The fading fear is demonstrated by the Cboe 1-Day Volatility Index (ticker VIX1D)’s performance around these catalysts over the past year.
Launched by Cboe Global Markets Inc. on Monday to help capture expected price swings in the S&P 500 for the next 24 trading hours, the VIX1D’s back-dated data has shown declining levels of nervousness around macro events of late.
Last year, it regularly spiked in the session prior to either the release of consumer price index or the Fed’s policy announcement. For example, on Dec. 12, right before the CPI print, the VIX1D surged to 47. By contrast, on the day before the last CPI, it closed near 19 on April 11.
The downtrend may be a function of the calm that has blanketed the market in April. The VIX1D’s older sibling for 30-day volatility, Wall Street’s widely followed fear gauge known as the VIX, last week fell to the lowest level since November 2021. Still, a case can be made that with inflation softening for nine straight months, the macro picture may be less unpredictable or scary.
“There seems like less uncertainty on what the Fed will do. It’s much closer to the end of hiking,” said Danny Kirsch, head of options at Piper Sandler & Co. “Options have been too expensive past several FOMC and CPI so the market was discounting perhaps too much.”
One-day VIX is not the only indicator that points to the potential ebbing influence of macro forces. In part thanks to ongoing earnings season, the kind of lock-step moves gripping equities is easing. Realized correlation among S&P 500 shares has fallen this month, hitting the lowest level since late 2021.
Expectations for a Fed pause have been building, especially after the collapse of several regional lenders including SVB Financial Group in March. Yet to Dean Curnutt, founder of Macro Risk Advisors, macro forces are still at play, with investors shifting their focus to the deadline for US government debt ceiling.
“In 2022, ‘event risk’ was priced into ultra-short dated SPX option prices as a function of FOMC and CPI day uncertainty,” he said. “2023, especially post the SIVB collapse, is setting up differently. Replacing this is now concern about the debt ceiling, a risk with a date that cannot be pinpointed.”
–With assistance from Sam Potter.
(Updates with fresh commentary in last two paragraphs.)
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