Macro Volatility Digest
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US vs. Europe Diverge as Recession Odds Increase
Credit led the increase in cross-asset volatility last week as concerns around US growth intensified with the escalation in Trump’s trade war. VIXIG index jumped from the 64th to the 91st percentile high (1-year lookback). However, on a longer lookback, credit volatility actually screens as the cheapest across asset classes. While equity, rates, and FX implied vols are all trading 0.5 to 1 standard deviation above their 10-year average, credit volatility still remains below its 10Y average (see chart below). Read more in this week's Macro Vol Digest.
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WHAT STANDS OUT:
Credit led the increase in cross-asset volatility last week as concerns around US growth intensified with the escalation in Trump’s trade war. VIXIG index jumped from the 64th to the 91st percentile high (1-year lookback). However, on a longer lookback, credit volatility actually screens as the cheapest across asset classes. While equity, rates, and FX implied vols are all trading 0.5 to 1 standard deviation above their 10-year average, credit volatility still remains below its 10Y average (see chart below).
Optimism around Germany’s historic fiscal plan, coupled with pessimism around the US outlook, have led to a near record underperformance of US stocks relative to their global peers, with SPX® trailing SX5E by almost 20ppts over the past 3 months – the most in 10 years.
Correlations are finally starting to reprice higher, with the COR1M index jumping over 9 pts to 30% last week – its highest level since last August. As we highlighted several weeks ago, tariffs are macro risks, even if they may have disparate sector & stock impacts.
Chart: Credit Volatility Trails as US Recession Risk Rises
Source: Cboe
