The VIX, the macro and the ugly

15 days till the end of financial year yet it feels like we are just at the beginning of the action in financial markets for 2015.

A man looking upwards at a screen
Source: Bloomberg

What’s spiking my interest:

If you look at the world VIX index (MSCI), you would imagine that having seen a correction in Germany, France being off 8.5% over the same period, the FTSE also heading backwards and the action in the bond markets would mean that the VIX would have shifted substantially year-to-date - It is up a grand total of 4%.

The world VIX has been a constant reminder to me about just how ‘fine’ markets are with the amount uncertainty floating around. The US VIX is basically unmoved.

Yet when you look individually at global indices and the VIX indexes attached that is clearly not the case - VIX of domestic markets are ramping up. It’s just that the size of the increases are low in comparison to previous risk events. VIX indices for 2015 are 16 to 20; compare that to 2011 of 50 to 60 and 2012 of mid 30s.

Markets are calling out for some sort of an answer to the macro picture: The Fed funds rate ‘lift-off’. Yes or no? If so, when and by how much? Grexit – yes or no? Default and in or default and out of the Eurozone? We did learn one thing over the weekend. Greece will matter whatever happens.

Greece was seen as a ‘non-event’; or more to the point the market positioning was that the bluster and rhetoric would be noise to the final deal being some sort of bailout and it remaining in the Eurozone. The expectations are Europe will happily kick the can into 2016 or 17.

However, the fact the IMF walked out of talks on Thursday and flew straight back to the States is blurring that thought. It will be murkier still after the news from Brussel’s that a finance ministers meeting lasted 45 minutes on the weekend - doesn’t give you confidence a deal will be done by 19 June. This will get ugly.

The macro themes in the US are also still to play out; the fact the complacency index is still at peak levels of 14 (although a small push now and it will fall out) shows US (and global) investors are more than happy to look at things on the micro level and see the macro events as a low impact.

US corporates are still seeing EPS growth despite complaining about the USD strength which is adding support to the US boards. How they behave post a ‘lift-off’ scenario will be interesting as the USD strength will definitely impact top line numbers and that will inevitably filter down P&L’s.

There is plenty of ugliness out there and we are yet to really see it play out in trade. For us in the Asian region and with end of finical year reporting a mere month off – the ugliness may come in from two fronts - top and bottom.

Ahead of the Australian open

We are currently calling the ASX down 25 points to 5520, it will be a tricky week to navigate as the macro events begin to play out.

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