The ‘Fear Index’ Flashes Warning Signs

The fear, or risk index measured by the CBOE VIX - also known as the Volatility Index rose above 20 yesterday, in a potential warning to investors on the impending volatility in the markets. The last time the VIX jumped above the 15 level, the US S&P500 Index fell sharply from 2050, over the following months with the declines seen accelerating after the December Fed meeting. The S&P500 fell to 1800 levels briefly thereafter, before consolidating and rising back.

At the time of writing, the S&P500 pared its losses and posted a new high, trading above 2100, but the upside is starting to look weaker by the day. Safe haven assets have gained as a result. Gold prices are back trading above the $1250 psychological level. Investors also bid up the bond markets, sending yields to record lows, in an apparent flight to safety.

In terms of the fundamental catalysts, the FOMC meeting begins today concluding in the monetary policy statement due tomorrow. Following the FOMC, the Bank of Japan, BoE and the SNB meetings converge on June 16th, adding to the volatility. The UK's referendum vote is just a week away. The risk sentiment was steadily declining since early June as investors weighed the risks of the Brexit outcome and partly due to the concern on the pace of recovery in the US economy following the June 3rd non-farm payrolls report which disappointed.