Risk assets may have stormer conditions if Federal Reserve reduces interest rates, as expected, on September 17. That’s the message from Futures tied to the VIX index, a measure of expectations of volatility in the S&P 500 over the next 30 days.
The index, also called Wall Street’s fear gauge, is calculated in real time from the prices of opportunities on the S&P 500 and reflects how much investors expect the market to fluctuate, with higher values indicating greater levels of uncertainty.
The spread between October Vix Futures -Contract (Contract next month) and the September contract (the front-month contract)is expanded to 2.2%, an extreme level by historical standards, according to data source trading. The contract in September expires the same day as the FED meeting.
Meanwhile, the front-month contract is only for a small prize for the cash index.
“Cash is fair compared to September … but September is extremely low compared to October Futures,” wrote Greg Magadini, director of Derivatives at Crypto Derivatives Data Analytics Company Amberdata, in the weekly newsletter.
In other words, dealers discount the risk prior to the FED meeting and bet that the interest rate expectation will keep the markets stable as they approach the decision.
The US Central Bank is expected to lower its target rate by at least 25 basic points when it meets next week, according to CME’s FedWatch tool. Some market participants are even placed for a reduction of 50 bps.
However, Futures in October tells another story that suggests that investors expect increased turbulence when Fed’s decision is out of the way and the rates are priced in.
“VIX -Futures for September has priced risk, while October could be ugly … A theme to keep in mind risk assets in my opinion,” Magadini wrote.
Historically, VIX has exhibited a strong negative correlation with stock prices, typically increasing during bear markets and periods of market stress as they fall as stock prices move on. This means that the potential volatility boom after the bold decision could be characterized by a downturn in shares.
Bitcoin is known for tracking the mood close to Wall Street, which means that a potential volatility explosion in stocks could quickly throw over to the cryptocurrency market. And like shares, the turbulent period could be characterized by Bearish Price action.
Since November last year, the relationship between Bitcoin’s spot price and its 30-day implicit volatility index has become negative. In addition, Bitcoin’s volatility index – BVIV and DVOL – have recently reached record high correction levels with VIX, highlighting Bitcoin’s growing adaptation to wider market volatility trends.
