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Crudely interrupted

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In the last full trading week of the year, the closing of the books was crudely interrupted by a crossover from chaos in the energy markets, accompanied by a total collapse in the Russian Rouble, says Tim Edwards, Index Investment Strategy, S&P Dow Jones Indices…

The VIX closed on 17 December at 19.4, helped on its way down (from Tuesday’s high of 24) by the measured and patient comments issued yesterday by the US Federal Reserve.
All of our global equity volatility measures are up, but their increases pale in comparison to their equivalents in the oil markets. At 56.8, the CBOE Oil ETF Volatility Index is at a three-year high and at a massive premium to realized volatility: the decline in oil prices has caused disruptions elsewhere, but the actual volatility of oil price changes has been relatively low. Since the summer, energy prices have just kept on going down.
Initial market action today has been a little less chaotic. At the time of writing, President Vladimir Putin is currently delivering a statement promising that his economy will recover in two years, the Russian Rouble is up a little, and the Russian equity markets considerably more so. Even crude oil has joined in, up 3% at time of writing and up 2% yesterday.
Credit markets, which somewhat ignored November’s recovery in equities, continue to price in a more elevated risk environment. The S&P U.S. High Yield CDS Index hit its highest level this year on Tuesday (352bps); it remains up 22.5 bps up since this time last month.
Despite the importance of oil in commodity indices – and the importance of energy in recent equity performances – the correlation between the S&P 500 and the S&P GSCI commodities index continues to fall.
Indices reflecting long positions in VIX futures had a good month, while the S&P Daily Inverse Short-Term VIX index recorded a loss of over 13%.
The shape of the VIX futures curve is unusual, perhaps suggesting that participants expect the current bout of volatility to decline as quickly as the last one. The upcoming pattern of holidays also plays a role (daily moves may be larger due to the increased time between trading sessions)

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