US investors are increasingly seeking protection from sharp stock market swings ahead of a period traditionally considered volatile. A sign of growing caution is the attention to the VIX index, which reflects the expected volatility of the S&P 500 index over the next 30 days based on option prices, CNBC Top News reports.
Seasonal and political risks
In September and October, the VIX usually rises after declining in the middle of the year. Market participants are also factoring in US midterm elections, risks to interest rates due to increased bond supply, hawkish signals from central banks, and an intensification of hostilities in the Middle East in recent days.
Nomura strategist Charlie McElligott said equity investors have more reasons to hedge after money returned to the market. In his assessment, the skew in the price of three-month VIX call options is at the 91st percentile. This means that bets on rising US equity volatility in the coming months are relatively expensive.
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Signals from the bond market
Equity Armor Investments CEO Luke Rahbari expects higher stock market volatility in both directions through the end of the year. According to him, changing rate expectations and pressure between different asset classes are already creating tension that is beginning to spill over from the Treasury market into equities.
Rahbari also said that the MOVE index, which measures volatility in US Treasury options, remains elevated because of revised expectations for rate cuts, inflation, and the volume of government bond supply. At the same time, according to CreditSights, MOVE and VIX are near their 10-year averages, while corporate credit spreads remain historically narrow.
Tiger Brokers strategist James Ooi said volatility usually weakens in November. In his assessment, after the midterm election results, the VIX may decline by about 4%, as the political course becomes clearer for investors.
