Sunday, 19 August 2018

VIX jumps as Brexit fears mount

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The VIX index of options volatility on the S&P 500 jumped to more than 18 on Monday, its highest level for more than two months as global markets begin to price in wider implications associated the UK’s referendum on EU membership on June 23.

Support for the “leave” camp has been building in recent weeks, according to recent polls. The most recent ORB poll published on Friday for The Independent newspaper put the leave camp at 55%, a full 10 points ahead of “remain” rivals, though polls published over the weekend put the two camps almost neck-and-neck.

“US markets had been underestimating the threat of Brexit for a long time, but the consequences could be vast and global,” said an equity strategist at a US house. “Previously we’ve seen the dollar trade in a very narrow band, but if there is a Brexit, we could see dramatic selling of the euro and a flight to the dollar, which could lead to stability concerns.”

One-month sterling volatility jumped to record highs on Monday as investors rushed to hedge further currency weakening in the event of Britain voting to leave the EU. One-month options volatility traded above 28 in mid-morning trade, surpassing the previous high of 25 that was reached during the 2008 global financial crisis.

The FTSE Volatility Index hit 27 during the morning session, a seven point jump over the week.

Concerns were felt across eurozone risk assets. The EuroStoxx 50 lost 1.8% through the morning while the VStoxx index of volatility on the European benchmark surged to more than 34, a 10 point jump over a week. That put the VIX/VStoxx differential at 16 points, its widest level for almost a year

Short position

Despite the jump in the VIX during European trading hours, which added to a two point increase in the benchmark on Friday, VIX futures traders have been largely positioned for a decline in the volatility benchmark.

Short positions held by non-commercial traders stand at a record 268,000 contracts, according to CFTC Commitments of Traders data. The net VIX futures position for non-commercial holders (primarily asset managers and hedge funds) stands at -103,000, the most negative level since September 2013.

Some believe that recent moves in the benchmark may have been exacerbated by record short positioning in VIX futures contracts. The VIX opened below 14 last Monday and printed below 13 last Tuesday.

“Increase in net short positioning in VIX futures by the leveraged funds would lead to additional upward buying pressure in a risk-off scenario, as they would cover their shorts and add to the longs,” said Barclays equity derivatives strategist, Maneesh Deshpande, in a recent note to clients.

The rush for short VIX positions reflects the steep contango that has prevailed in the VIX futures curve, with longer dated contracts trading above shorter expiries, enabling investors to book a carry by rolling their shorts.

Extreme short positioning is widely thought to have contributed to the volatility shock of August 2015, when the VIX surged to more than 50, triggering a two-hour stoppage in the calculation of the index. 

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