Our Market Stress Nowcaster, which indicates the current level of market tension by looking at liquidity, volatility and credit spreads across geographies and asset classes, shows clear improvement since the height of the crisis. Yet, it still has some way to fall to reflect fully the improving macro context.
The VIX Index in 2020 saw dramatic swings, from 82 in March to 21 at the end of the year. This strong improvement was also reflected in credit spreads. High Yield spreads reached 1084 bps in the US in March and 870 bps in Europe, falling back to 400 and 350 bps respectively at the end of 2020.
However, two factors lead us to believe that market conditions – and therefore investor sentiment – could improve further. First, in spite of the lower VIX now, the term structure of its futures remains upward sloping and the far end of the curve remains quite high by historical standards ( August 2021 futures were still about 26% at the end of December 2020). Second, the skew of the VIX curve, which indicates whether investors are insuring themselves against a drop or a rise in equity markets, remains strongly tilted towards downside protection.
Source: Bloomberg, Unigestion. Data as at 31 December 2020.
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