The VIX Index has been soaring in the last 24 hours, boosted in part by Donald Trump’s highly anticipated address to Congress, in which he doubled down on the most aggressive tariff policies seen since the 1940s in some respects.
Trump delivered a speech that, despite its rhetoric of economic strength, is set to cause concern throughout financial markets in the next 24 hours.
The VIX Index, which is based on S&P 500 put options and is considered a measure of anticipated US stock market volatility, has soared from under 15 to break the 23 barrier in the last 30 days. Much of that has come in the past week. At the same time the S&P 500 itself is selling off fast, moving down towards the 5500 level, which on current momentum, will occur in the next few days,
The VIX could soon be in territory we last saw when Russia invaded Ukraine in 2022.
Great Financial Crisis 2.0?
The global economy could now be on the brink of its most severe disruption since the 2007-2008 financial crisis, besides the pandemic, according to senior wealth managers.
Nigel Green, CEO of of deVere Group in London, said this morning: “This is no longer just a warning sign. This is seemingly turning into an all-out trade war.”
The immediate market reaction to Trump’s sweeping tariffs on Canada and Mexico was stark, with declines across major indices, reflecting investor fears of a prolonged and damaging standoff. The true extent of the fallout, however, has yet to be fully realised, especially as wider reciprocal tariffs are set to be rolled on 2 April, according to Trump in his address.
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There is now huge government policy uncertainty, with the Fed being kept on the sidelines by stubborn inflation, softening macro data, and a US government doubling-down on the hawkish rhetoric on all fronts. This is not a bullish scenario for either US stocks or the dollar.
“That’s a pretty toxic mix, and one which makes it next-to-impossible for market participants to accurately price risk,” said Michael Brown, Senior Research Strategist at Pepperstone. “It’s also a mix which, contrary to conventional wisdom over the last few years, is making the US one of the most unattractive markets across [developed markets].”
This is a stunning prognosis given that US stocks were so favoured by investors in 2024 while other markets were struggling.
US dollar starting to look toxic
“Against this backdrop, it’s easy to see why the buck has gone from ‘best of the bunch’ to ‘don’t touch with a bargepole’ in the blink of an eye,” Brown said. “When the dollar bull case rests on the US economy continuing to outperform its peers, then incoming data softens, and folk in the White House try to shoot themselves in the foot by slapping tariffs on the USA’s closest neighbours, it’s not exactly surprising to see market participants take a relatively dim view of proceedings.”
We have, then, rather rapidly moved back towards the middle of the ‘dollar smile’, where participants are betting that US economic output ‘catches down’ to that seen in the rest of the world.
The DXY, as such, slipped below the 106 figure yesterday, to its lowest since last December, with the greenback losing ground against all major peers.
Canadian dollar holding up
“Admittedly, I’m a little staggered that the loonie trades basically where it was on Friday, despite 25% tariffs having been imposed, but we can only trade what’s in front of us,” Brown said.
That said, if the CAD can shrug off tariffs from its closest trading partner, then the EUR should have no trouble doing the same, with the common currency moving further north of the 1.05 mark yesterday (Tuesday). Meanwhile, haven demand drove USD/JPY down to the 148 figure, with spot trading to its lowest level since last October.
Don’t rule out the loonie leaking lower, though, particularly if tariffs remain in place for some time, as the longer tariffs persist, the more detrimental their impact will be.
