2015 Retrospective: There was no shortage of financial crises or investor alarm over central bank monetary policies, OPEC’s oil policy, and the generally anemic state of the global economy in 2015. Each CBOE VIX Index recorded the level of stress in its underlying sector. As the graphs below illustrate, different triggers struck panic across markets.
VIX Index, Volatility Gauge for U.S. Equity Market: The uptrend in expected volatility of the U.S. equity market continued in 2015. The peak of VIX on August 24 was its fifth highest closing value since 2003, and the median value of VIX is higher than in the previous two years. The change of regime of volatility changed mid-year, after a subdued period of several months of VIX values in the teens. Then Greece defaulted on its debt and the VIX Index shot up close to 20 in June. The crash of the Shanghai stock market on August 24, 2015, pushed the VIX above 40 as ETPs all reached for the exit at the same time. VIX levels subsided but the sharp decrease in oil prices on December 11 brought it back up to the mid-20s.
Figure 1. Oil price declines, global woes spur VIX Index moves
TYVIX, Volatility Gauge for U.S Treasury Market: FOMC monetary policy has nearly flattened expected Treasury volatility. In 2015, TYVIX fluctuated in its lowest range since 2003, from 5.7 to 7.66. The peak value of TYVIX occurred early in the middle of January when the Swiss National Bank lifted the cap on the Swiss Franc. The financial crises in Greece and China also impacted TYVIX. The peak was on December 14, on the eve of the FOMC’s well-broadcast decision to lift its benchmark federal funds rate from .25 to .5.
Figure 2. Fed policy dominates Treasury volatility levels.
EUVIX, JYVIX and BPVIX -- Volatility Gauges for Euro, Japanese Yen and British Pound/Dollar Exchange Rates: The volatility of exchange rates increased in 2015, especially the volatility of the euro-dollar pair. Apart from the impact of crises in Greece and China, euro/dollar volatility reacted to indications of divergent economic growth and interest rates in Europe and the U.S. The main trigger for yen/dollar volatility was worry over a slower pace of economic growth in China, and the main trigger for British pound/dollar volatility was uncertainty about the UK election.
Figure 3. Currency volatility indexes
2016 VIX Volatility Forecast
Figure 4. Term structures of VIX, TYVIX and currency volatility indexes.
VIX: Major banks are forecasting a stock market rally in 2016 of between 7 percent and 11 percent. Investors are not as bullish -- they are rushing to buy S&P 500 puts that expire all the way to September 2016 to hedge a possible downturn. This is why term structure of VIX is in strong contango. The September 2016 forward value of VIX is 17 percent higher than spot VIX.
TYVIX: The FOMC is expected to deliver four .25 increases in the federal funds target rate for 2016. However, oil prices are expected to stay low -- there no inflation in sight and only moderate economic growth. Hence, the Treasury yield curve at its flattest in eight years, and little Treasury volatility is expected over the next year. January 2016 TYVIX is above spot TYVIX, but is quite flat beyond January.
EUVIX, JYVIX and BPVIX: In currency markets, traders are banking on greater volatility which they think will result from divergent interest rates in the U.S. and Europe. The term structures of EUVIX, JYVIX and BPVIX are V-shaped, with volatility values predicted for January below spot volatility, but only a slight rebound in values expected in February and March.