It is painful but peak capitulation has not been reached

VIX forward curve suggests more pain ahead

While it is painful in equities this year and the only safe-havens have been commodities and cash, markets have unfortunately not reached its capitulation level. The degree of inversion in the VIX forward curve is often a good sign that a short-term bottom has been reached. The chart below shows the difference between the 2^nd VIX futures contract and the VIX Index (spot). More negative values mean more inversion or that spot is moving above forward volatility. As the chart also indicates deeply negative values are associated with market meltdowns and severe risk-off. We are not there yet, so another 10% decline in equities is not unimaginable.

The energy crisis will get worse

One the big themes that will continue to drive inflation and market dynamics is the ongoing energy crisis which has been amplified by the war in Ukraine and the coming ban of Russian oil in the EU. But the biggest problem is that of available crude oil which is driving up refinery margins, see our equity note A new golden age of oil refiners, which is indicating an oil market that is wildly out of balance. Moreover investments are not going up meaningfully despite higher prices. ESG mandates and the 5-year forward on Brent crude at $70/brl are holding back investments so the front-end of the oil market will continue to get more expensive at the cost of economic growth and household purchasing power for other goods and services. IEA’s recent statement (see below) suggests that things are extraordinary and that the energy crisis will continue to add to inflation.