Is market volatility down to stay or just in a temporary lull

As equity markets continued to rally sharply on Tuesday on the back of a strong start to corporate earnings season and decreased concerns over geopolitical risk, market fear as measured by the VIX volatility index continued to march lower. Since the sharp but short-lived stock correction in early February, during which the VIX recorded its largest one-day rise in its history at 116%, market volatility has declined sharply but has still remained in fluctuation around historically higher levels.

In the past 2-3 months, concerns over rising inflation and interest rates, increased political instability in the White House, President Trump’s protectionist trade policies, the specter of a trade war between the US and China, and rising geopolitical tensions over the Middle East, have all contributed at overlapping times to increased volatility in equity markets and an elevated VIX.

While none of the concern factors noted above have gone away – in fact, some can easily be re-triggered and exacerbated at any moment – markets have recently appeared to become more desensitized to the heightened perception of risk that has prevailed in the last few months. Even last week’s surprise attack on Syrian chemical weapons facilities by the US, UK, and France, which may still result in more intensified conflict between the US and Russia, led to only stronger markets and lowered volatility.

The last several trading days from mid-week last week have seen stock markets rise out of a choppy consolidation while the VIX fear gauge has continued to gap lower and decline to more normal levels, currently just above 15. It should be noted, however, that a similar volatility decline occurred in early March, but was quickly followed by yet another surge in the VIX as market fear returned. Therefore, the question remains as to whether the VIX’s current drop may just be a temporary lull or if it can be seen as a bonafide return to the business-as-usual market environment that prevailed throughout most of last year.

If previous volatility spikes are any indication, most notably the latest major one that began in August of 2015, a return to prior low levels of volatility can often take 2-3 months, but may sometimes take longer. The current VIX elevation is nearing two-and-a-half months old. While this is not to say that markets are fully back to “normal” or that 2017’s exceptionally low levels of volatility will return this year, the reliably mean-reverting tendency of volatility and the VIX suggests that calmer, less violently reactive markets may prevail, at least for the foreseeable future.

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

FOREX.com is a registered FCM and RFED with the CFTC and member of the National Futures Association (NFA # 0339826). Forex trading involves significant risk of loss and is not suitable for all investors. Full Disclosures and Risk Warning. Increased leverage increases risk.

GAIN Capital Group LLC (dba FOREX.com) 30 Independence Blvd, Suite 300 (3rd floor), Warren, NJ 07059, USA. GAIN Capital Group LLC is a wholly-owned subsidiary of StoneX Group Inc.