Volatility was the big investment story for last month. For many, this will be the big investment story for the rest of the year. The post-Financial Crisis period has been marked by low volatility punctuated with a few spikes, but the VIX trend and level has been down. Perhaps this is the result of the new normal of slower economic growth, or it could be a function of government policies that try and dampen risk. What is clear is that some forms of leverage have declined so that market sensitive adjustment of positioning has declined, albeit risk parity and VaR models will cause more repositioning by investors on spikes.
A focus of August has been the change in the term structure of volatility with the VIX futures curve moving from contango to backwardation. The market did view the level of VIX moving higher but the events that may have caused the volatility spike are viewed to be short-term in nature. The slope of the backwardation has already fallen as has the level of the VIX, but an investor has to move out 90 days to see a flat curve. We suspect that the curve will further flatten and decline after the FOMC meeting. The forecasts in the term structure are already suggesting this decline.
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