The Iran/ Israel conflict means that the focus is back on the Vix, Wall Street’s fear gauge that measures volatility in the S&P 500. The Vix is important when geopolitical events flare up because it tells us about the potential for greater volatility in global stock markets.
However, while it’s early days in this conflict, so far, the impact on the Vix has been small. The Vix spiked on Friday at 22, and is currently trading just above 20, even though the conflict remains ongoing.
The current level of the Vix is above the average for the past year, which suggests that US stocks are moving more than they would normally, although the average is 18, so price swings are not large right now. US stock price changes are not fluctuating nearly as much as they did in April, when the Vix surged above 40.
Chart 1: Vix index, daily chart for the past 12 months.
Source: XTB and Bloomberg
What could get the Vix moving?
The market has experience of absorbing tensions in the Middle East well, which is why stocks are falling in an orderly fashion so far. We may need to see a sharp escalation in the conflict, for example, nuclear threats, wider involvement including within the region and the US joining forces with Israel, or regime change in Iran, to cause a significant spike higher in stock market volatility.
Stocks are more volatile than bonds
However, it is worth noting that volatility is still elevated vs. the average level of the last 12 months, so we could see more days like Tuesday, with the potential for stocks to move by more than usual.
Another point to note, stock market volatility is higher than bond market volatility, as you can see in the chart below. This means that stocks are reacting in a more forceful way to geopolitical events between Iran and Israel, compared to bonds. It also means that there are more opportunities in stocks compared to bonds right now.
Chart 2: Vix and the ICE Mov index, which measures Treasury market volatility.
Source: XTB and Bloomberg
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