Volatility index, VIX, continue to surge higher. Hits its highest since August 5 last year

It was only on Friday that I posted:

• The CBOE Volatility Index, VIX, has closed at its highest nearly three months
• Or why your 401K is getting smashed

The VIX has risen again, this time to 27.86, which is a big number – the highest since August 5 last year.

Trump admitted on Monday the risk of a recession, said he’d tolerate it. This didn’t help stocks. Has anyone called it ‘Trumpcession’ yet?

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For info on the surge in VIX. So what, you ask?

The TL;DR is that a sharp jump in VIX typically signals market stress, risk aversion, and potential declines in equities. It can lead to safe-haven flows and credit tightening.

Extreme spikes sometimes mark turning points if central banks or policymakers step in. I see almost zero chance of this right now (well, I think its zero, but you never know, right?).

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And, ICYMI:

More detail:

A sharp increase in the CBOE Volatility Index (VIX)—often called the “fear gauge”—has several important implications for financial markets:

1. Stock Market Decline

• The VIX tends to rise when equity markets drop, reflecting investor fear and uncertainty.
• A significant VIX spike often signals panic selling and increased hedging activity using options.
• If the VIX remains elevated, it suggests sustained bearish sentiment, which may lead to further stock market weakness.

2. Increased Demand for Safe-Haven Assets

• Investors typically rotate into safe-haven assets, such as:
  • US Treasuries (yields fall as bond prices rise).
  • Gold (seen as a store of value in uncertain times).
  • Japanese yen (JPY) and Swiss franc (CHF) (traditional safe-haven currencies).
• This can lead to yield curve movements, potentially flattening or inverting it further if recession fears intensify.

3. Credit Spreads Widen

• Higher volatility often leads to a flight to quality in the credit markets.
• Corporate bond spreads (especially high-yield or junk bonds) tend to widen as investors demand higher risk premiums.
• This can make financing more expensive for companies, potentially hurting corporate investment and economic growth.

4. Increased Market Liquidity Risk

• Sharp VIX spikes can lead to illiquidity in various asset classes as investors rush to unwind positions.
• Bid-ask spreads widen, making trading more expensive.
• Market makers may reduce their activity, exacerbating price swings.

5. FX Market Volatility

• Emerging market (EM) currencies often depreciate against the US dollar (USD) due to risk aversion.
• Investors pull out of riskier assets and return to USD liquidity, which strengthens the dollar.
• Countries with high foreign debt exposure (denominated in USD) may face additional pressure.

This article was written by Eamonn Sheridan at www.forexlive.com.