THE CURRENT FACE OF RISK-OFF
A spike in volatility has become a common summer occurrence, with varying catalysts driving the VIX higher over each of the past 4-years. There are always different themes that have caused this volatility, with 2012 a Greek/Euro durability fear, 2013 the taper tantrum summer, while last year was a Russia/Ukraine/Euro growth story. Of course this year we have Greece and China along with the concerns associated with a Fed rate hike in the fall. While each of these drivers is unique, the VIX has been a good proxy for the global risk on/risk off trade over the past several years, with many markets rallying in the period after the peak of the VIX. As the table below indicates, there are certainly similarities with this year’s spike in equity volatility and prior summer episodes. In particular, we have seen the VIX surge 65% increase from its pre-summer trough, which corresponds fairly closely with the 55% average spike in the VIX over the past few summers. This has been followed by a 35% decline in the volatility index one month after it peaked, again close to the movements over the past few years. This certainly provides some comfort that the worse may be behind us, and growing risk appetite may emerge as the summer progresses.