The CBOE Volatility Index has priced out the risk of a U.S. recession, according to a JPMorgan currency analyst. Yahoo Finance markets reporter Jared Blikre breaks down what the VIX is showing.
Video Transcript
- Will it or won't it? A much-discussed recession still has yet to appear this year. Some on Wall Street remaining cautious of the year's market, while a few are optimistic the worst is behind us. The VIX, the so-called fear gauge, a popular measure of the stock market's expectation of volatility, has priced out the recession risk. With more, we are joined by Yahoo Finance's Jared Blikre who joins us now. He's getting set up right now. All right, we're getting him set up, getting locked and loaded for Professor Jared. All right, Jared. Let's talk about the VIX today. What do we got?
JARED BLIKRE: All right. Let's talk about the VIX. And I'm going to bring along my helping hand here, the Wi-Fi interactive, where I'm looking at a post. This was on the market here. The source is the JPM FX team. They're saying the VIX has priced out US recession risk, dragging FX volatility, that's foreign exchange volatility, with it, that would be down, and driving safe haven dollar outflows. So here is the VIX in white. And this goes back to December of 2020. So it leaves out the worst of the pandemic. But you can see, very closely correlated with this blue line that I'm just not very well tracing it here. The point is that both of those are coming down heavily.
And I don't know that you want to price in recession risk with the stock market, probably go in terms of the bond market. But anywhere you look in this market, I'm going to go down. Let's take a look at the bond market. Here's the ICE BofA MOVE index, kind of like the VIX of the bond market here. Here's a three-month chart. And you can see, over the last two days, we have broken to new lows that we haven't seen this year yet. And here's a three-year view where you can see we are coming back to the 100 level. That's a big psychological number. I would expect to see maybe a pause or a bounce there. But volatility, heading in the right direction to support all of this risk on talk.
And then here's another look at the VIX. You can see right now, we are at multi-year lows. And this is really starting to feel like the regime that we had before the pandemic. Also, in late 2021, I don't know that it feels the same as that, but definitely in the late 2019 era. So a lot of things have changed over the last week. I do have some other notes. Besides FX volatility, some other things have been changing within the market. Let me just pull up this note that I have right here. I believe this is from Goldman. And indeed, here's a put-call skew shows that single stocks and index investors are positioned for upside.
There's a key line in this report. The skew measures indexes-- excuse me, very much out-of-the-money call and put. So basically, those long-shot bets, these are cratering, showing more interest in those bets. Key line here is index put-selling and call-buying jumped on June 2. What was happening on June 2? Well, that was the day of NonFarm Payrolls. And that was a very pivotal day. That's when we saw this first rush into the value, cyclical sectors that we've seen largely sustained since then. So I think that was a real game-changer.
And I just happen to land here on the Wi-Fi interactive on a one-month view of the S&P 500 sector list. And you can see, it's a healthy mix at the top of consumer discretionary, that's retail XLY, followed by XLK, that's tech, and XLI, that's industrials. All of these have been expanding the breadth of the rally. But it does remain, for many, a show-me rally. Because we still got the Treasury looking to refill its coffers to the tune of 1 and 1/2 trillion dollars. That's a lot of money to be sucked out of the market this year.
- Yes, indeed it is. But it is interesting to see the cyclicals lead that rally over the past month. Thanks so much, Jared. Appreciate it.
