VIX and Stocks Not Aligned Ahead of Brexit

U.S. and foreign investors have woken up to the fact that a Brexit could become a reality.

You can see this in the rather strange action of the CBOE Volatility Index, which roughly measures investor demand for protection against market declines in the next 30 days.

The VIX moved five points — from roughly 15 to 20 — in two trading days. That is a fairly rapid move, but what’s even stranger is the move in stocks.

Normally, when you get a five-point move in the VIX in a short period, you would expect the S&P 500 to move roughly 3 percent to 4 percent — but the S&P only moved about 1.7 percent.

That means there wasn’t as much selling of stocks as you would expect, but there was suddenly a lot of demand for protection.

What would account for this surprisingly strong move in the VIX?

1) The VIX had a sharp move up yesterday at about 11:30 a.m. ET, almost exactly when a Guardian poll came out indicating surprisingly strong support for a “yes” vote on the U.K. leaving the European Union.

Traders had discounted the idea that a Brexit could happen, but they are now starting to change their minds. The concern is not just that a Brexit could weaken the British pound, it could also hurt British banks. A leave vote might also lower bond yields even further, weaken commodity prices (with the possible exception of gold), and hurt emerging market assets.

via CNBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza