Welcome to Saxo Bank Hong Kong

Please select your language
Macro 5 minutes to read

VIX index points to major risk event

Steen Jakobsen

Chief Economist & CIO

Summary:  This is getting serious. Very, very serious: the VIX fear gauge is flagging a huge risk event on Friday – the China-US trade deal cliffhanger. Our Saxo Strats view the outlook as binary: 5% to 10% to the upside should a diplomatic thaw occur, but perhaps a 25% plus correction if the talks end in acrimony.


ACTION: Increase in RISK ALERTNESS across our organisation and customers due to big event risk Friday (from midnight Eastern Time, that is 6:00 AM CET Friday) and massive ILLIQUIDITY in volatility.

COMMENT: This is a “separate” and “standalone” exercise vis-à-vis a breakdown in trade talks between the US and China as liquidity, or rather,  illiquidity, is behind all major market selloffs in history and this weekend has the biggest short position in volatility ever

Saxo Strats view: This is now a binary outlook – 

1. Either we get a diplomatic “softening” and a 5-10% upside 
2. or this could accelerate into a > 25% correction 

OVERALL this matches our “False Stabilisation” macro theme, where we argue the transitory impact from the lower price of money is just that, a "blip” in the downtrend in economic activity and credit facilitation which we expect to bottom by August……

We still see 75% chance of “some diplomatic agreement”, but the 25% tail-risk is now in play due to the “illiquidity constraints” illustrated below.

This first chart is from Marko Kolanovic @ JPMorgan and shows the relationship between VIX vol and liquidity. The relationship declines exponentially with the rise in VIX.

We have exceeded 22.50% in VOL just ahead of the New York open today…

The red arrows (done by me) show how we have moved from a rich liquidity of 6-8 K contracts to less than 2K……..as VIX rises, so does illiquidity.

The end risk here is – and its always the case in market crisis – that the market runs out of liquidity in this case in derivatives, not something the Federal Reserve can directly impact. (In this respect it mirrors the 2008/09 crisis where CDO, SPV became illiquid and created massive losses).

Chart illustrating the big RISK of ILLIQUIDITY 
 
The added risk here being the market is in biggest short position – EVER.

This from Ole S Hansen and his Commitmment of Traders report……
 

At the current price level most of the record short is under water:

As of yesterday the open interest has only fallen by 4% since April 30 => plenty more to come

Finally, here is an important run through of the dynamic hedging risk from: https://twitter.com/bennpeifert

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK Limited
Rooms 2001-02, 20/F York House
The Landmark
15 Queen's Road Central
Hong Kong

Hong Kong

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: Rooms 2001-02, 20/F York House, The Landmark, 15 Queen's Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.