The news did not make massive headlines. The VIX, the US volatility index which is also known as the “Fear Index”, just collapsed to an all-time low below 10. We recall that the 20-year average is above 20 for the index. A few weeks ago, Janet Yellen, Fed Chairman, warned markets about asset valuation which she considers as too high. Fed definitely believes that stocks markets are in a bubble. This is ironic as the Fed largely participated to underpin asset prices with free money.
While the volatility is at an all-time low, stocks prices are at an all-time high. There is then the potential relation between low volatility and high stock prices which could drive investors towards a sell-off. Markets are now in a pausing mode certainly fearing that consequence. However, stocks markets are not losing steam and may further head higher.
All eyes are on Fed now which balance sheet reduction should be discussed in November. Currency-wise the dollar is now trading at 14-month low on recent disappointment of Trump expected fiscal policies and Fed failing to fully deliver what was expected.
By Yann Quelenn