Sentiment is lower this morning with EU stocks down, S&P 500 futures pointing to a lower open, and the USD & JPY are both gaining versus most of their peers amid potential Spanish intervention of Bankia and Greece’s failure to form a pro-austerity government. Commodities are moderately lower on the typical risk aversion trades we are seeing this morning.
What Gives? A Ratio Study on The VIX
Has anyone checked out the ratio of the VIX (equity market volatility), to the Markit CDX HY indices (tracks the cost of “insuring” speculative grade debt)? Last week the VIX closed at 0.032 times the level of the Markit CDX High Yield Index, near the two and a half year low of 0.027 times reached in March. This is an indication that risk perceptions between equity and credit investors are diverging by the most in three-years. Might this be an indication of a fundamental shift in the markets? A.K.A- have we witnessed the VIX lows for the year? The VIX is 21% below its one year average, and the gauge of CDS is only down 2.4% from its average. Another fundamental reason to be bullish on the VIX: after the latest run-up in equity markets, investors should be looking to hedge gains, which will keep volatility bid.