US equity market implied volatility is collapsing. The VIX is down another 4.2% today and is near 12.0, which is the lowest since before covid.
VIX weekly
The market is buzzing with all kinds of talk about the mechanical reasons for the decline, including heavy options trading and year end.
But the main reason is that risk sentiment is upbeat and interest rates are falling. That’s been helped along by falling energy prices and tame inflation numbers globally.
A VIX in the 10-15 range was the norm for 2013-2020, with periodic spikes mixed in. The drop is a warning sign of complacency though, especially the risk that Fed might not signal as many cuts as hoped tomorrow. In focus will be the December 2024 dot. Expect about 50 bps in easing there but that might be seen as disappointing given the 110 bps in cuts priced into Fed funds futures.