Spot Up, Vol Up as the VIX Index® Prices in MidEast Tensions

Link to Report: Macro Volatility Digest

WHAT STANDS OUT:

• Cross asset implied volatilities are higher across the board on reawakened interest rate uncertainty and escalating Middle East tensions.  Interest rate volatilities rallied from single digit percentile lows to 32nd percentile (MOVE index +6nms to 100.15) and USD FX vols have surged to 9.41%, a one-year high. Meanwhile oil implied volatilities have begun to price in a 7volpt geopolitical risk premium following tit-for-tat threats between Israel and Iran to specifically target and disrupt global oil refineries in the aftermath of Iran’s missile barrage. Oil vols now trade at their one-year highs @ 46.4%.
• The juxtaposition of the positive reception of equity traders to Friday’s jobs report and the bifurcated incorporation of geopolitical risk premiums on behalf of volatility traders in response to MidEast tensions has created a spot up, vol up scenario in which the VIX Index rose 2.25 points to 19.21 last week at the same time the S&P Index® advanced by 23bps wk/wk. By modelling the historical reaction of spot S&P to VIX movements, we map out in the chart below, a timeline illustrating the progression of the 3.1 VIX pt geopolitical risk premium which is in turn comprised of the following:

o a 1.61 VIX pt premium on Tues, Oct 1 following Iran’s 180+ rocket missile salvo.

o a 1.49 VIX pt premium on Thurs, Oct 3 after reports that:

◘ Israeli officials were considering a “significant retaliation” targeting oil production facilities (and possibility nuclear facilities) inside Iran.

◘ a statement by Iranian ambassador Dr. Iraj Elahi that “any attack on Iranian oil facilities would have negative consequences for the US and the global energy market.

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