Markets In Limbo As Volatility Gyrates: VIX, EVZ, VXEEM, OVX

Investor risk appetite appears to be wavering as global markets trade broadly mixed. This largely comes on the back of a fiscal stimulus stalemate enduring in US congress and a notable escalation in Sino-American trade war tension. Not to mention, coronavirus concerns still linger due to building evidence of a worldwide second wave.

That said, most benchmarks of cross-asset volatility have drifted lower over recent months and weeks. Perhaps an ongoing volatility cycle normalization after the blow-up this past spring largely explains this, which a seasonal summer lull in market activity could be exacerbating. Thus it seems that complacency is likely on the rise as investors continue looking past several notable fundamental headwinds.

CHART OF EXPECTED VOLATILITY FOR S&P 500 (VIX), EURO (EVZ), EMERGING MARKETS (VXEEM), CRUDE OIL (OVX)

(Click on image to enlarge)

S&P 500 VIX INDEX PRICE CHART with Euro EVZ Emerging Markets VXEEM Crude Oil OVX

Chart created by @RichDvorakFX with TradingView

President Trump signed executive orders over the weekend aimed at extending unemployment benefits and foreclosure protections while also moving to temporarily waive student loan interest payments and defer payroll taxes. Yet, the unilateral action by Trump may face several legal hurdles, and further fuels uncertainty surrounding congressional gridlock over fiscal stimulus talks, which could weigh notably on the S&P 500 VIX Index. A sharp rise in the VIX ‘fear-gauge’ could signal that investor uncertainty is climbing with demand for S&P 500 downside protection.

Also, US-China tensions ramped notably late last week. This follows the Trump administration seeking to ban Chinese tech companies like TikTok and WeChat from operating in the United States due to national security concerns. Further, sanctions were placed on Hong Kong leader Carrie Lam after the country’s democratic election was delayed. It appears that this is putting pressure on emerging market equities as indicated by a spike in the VXEEM Index and modest uptick in expected crude oil volatility.

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