The CBOE VIX index, Wall Street’s fear gauge has edged higher from record low levels as investors react to the unfolding crisis in the Trump administration.
With the president now set to face an independent inquiry into Russia’s involvement in his election campaign, investors are questioning whether optimism in his ability to deliver on much-touted business-friendly reforms are misplaced.
Last week the VIX fell to 9.7, its lowest ever level in a decade. Following the news of the independent inquiry on Wednesday it had risen to 15.6 by markets’ close.
While still below the historic average of approximately 20, the move upwards suggests a reappraisal of what may commentators have labelled as complacency.
In an interview with Bloomberg’s Tom Keene last week, Mohamed El-Erian, chief economic adviser to Allianz, said the assumption that markets will remain stable has been a self-fulfilling prophecy as investors use leverage to build their portfolios.
‘Vacuums in finance are very profitable, to the extent that if you limit and constrain the banks, somebody else is going to fill that space.’
He warned: ‘The biggest unknowable is the delusion of liquidity. You have people who promise overnight liquidity that have taken quite illiquid positions particularly lending to various entities and that as long as the party continues it’s fine, but should this liquidity be tested, it’s not going to be as deep as people think.’
His comments come as the SEC is understood to be backtracking on its decision to approve a quadruple-leveraged S&P 500 futures ETF, as passive powerhouse Vanguard takes on the UK retail market with the launch of a discount fund platform, and assets invested in the passive industry globally surpassed $4 trillion.
Speaking at MSCI’s annual conference on Global Investing & Risk Management in London this week, Sandy Rattray, CIO at Man AHL and co-developer of the VIX defended the index saying: ‘I don’t think the VIX is broken, it’s just reflecting what the market is telling it.’
He added: ‘If I had told you with absolute certainty the outcome of events last year and you went ahead and made the logical investments, you would have lost a whole lot of money.’
‘One of the best performing strategies in 2017 is being short volatility risk because realised volatility has been so low.’
‘Ultimately volatility is too low, however, timing when it is going to go up is very difficult.’
With the VIX now on the rise, Trump’s troubles are about to extend to those who bet on a calmer-for-longer scenario.
One winner however is the trader dubbed '50 Cent', rumoured to be Jonathan Ruffer, who has ploughed millions into options that insure against a market meltdown.