Last Contango In Beijing? VIX Curve Inverts As China Doesn’t Cooperate On Trade

Why are investors optimistic that China will cooperate on trade? While seemingly in their best interest, the “sleeping dragon” has morphed into the “stubborn dragon.”

Volatility markets are signaling elevated risks for equities, flashing a warning sign that portended some of the major market meltdowns in recent memory.

The front-month VIX futures curve traded above the second-month future shortly after 10 a.m. New York Time as the retreat in the S&P 500 Index intensified. The inversion was spurred by a second wave of selling following comments from U.S. Trade Representative Robert Lighthizer late Monday, when he affirmed that President Donald Trump’s vow that the U.S. would hike tariffs on China wasn’t empty. Those comments delivered a blow to traders who hoped the president’s weekend tweets were mere posturing.

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Typically, the VIX futures curve is upward-sloping (in so-called contango) because the outlook for U.S. equities is more uncertain over the long run than the short run. When the curve is downward-sloping (in backwardation), it shows investors are acutely concerned with the near-term risks to U.S. equities.

It also inverted in the fourth quarter days after Federal Reserve Chair Jerome Powell indicated that rates were a “long way” from neutral, remarks which helped accelerate the drubbing in U.S. equities that sent the S&P 500 Index to the edge of a bear market.

China and The Federal Reserve? Two belligerent super powers!

 

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