Wall Street's fear has retreated into the shadows as markets experience a rare moment of tranquility. The VIX volatility index hovers near yearly lows, while the MOVE index just hit its lowest level since early 2021. Tail-risk hedges are being unwound aggressively, as this ultra-low volatility environment reasserts dominance over 2025’s trading rhythm—right before a critical Fed policy meeting.
Just weeks ago, panic gripped the markets. AI stocks surged then tumbled, and volatility spiked across equities and credit. But the fear dissipated as quickly as it arrived, with investors returning to low-volatility, high-conviction bets on risk assets.
Friday’s inflation data matched expectations, prompting traders to price in a rate cut next week and anticipate further easing in 2026—even as Fed officials show early signs of divergence on future policy.
Cboe’s derivatives market intelligence head, Mandy Xu, warns the current calm is fragile: "A divided Fed—or even a hawkish rate cut—could catalyze more volatility before year-end. The biggest volatility spike since April happened right after the last Fed meeting, when Powell sounded more hawkish than expected. That’s no coincidence."
**Risk Gauges Retreat Across the Board** The broad decline in fear metrics underscores today’s "super calm." The VIX lingers near 2025 lows, while the MOVE index—tracking bond market volatility expectations—just touched its lowest since early 2021.
Weeks earlier, panic ruled: AI stocks soared then reversed, and volatility flared in equities and credit. Yet the anxiety faded almost as fast as it emerged. Tail-risk hedges have been dismantled. A gauge measuring demand for tail-risk insurance plunged to yearly lows after a sharp rally. Products like the Cambria Tail Risk ETF remain slightly positive for 2025 but failed to sustain earlier surges despite November and April turbulence.
Meanwhile, a BofA-designed indicator tracking broad asset-class risks has dipped into negative territory, now hovering near pre-Fed-hike levels.
Investors are betting this calm will last. U.S. equity funds have seen 12 straight weeks of inflows. Yet caution lingers—per BofA citing EPFR data, money market funds just absorbed their third-largest weekly inflow this year.
Economists expect a split vote at next week’s Fed meeting, with St. Louis Fed President Alberto Musalem and Kansas City’s Jeff Schmid potentially dissenting. Governor Stephen Miran may argue for deeper cuts than 25bps, highlighting growing policy divides.
**Stable Data Bolsters Confidence** A key driver of the calm: economic data hasn’t surprised. The Fed’s preferred inflation gauge rose 0.2% monthly, with annualized gains holding just under 3%—signaling stable but sticky price pressures.
Though labor markets show cracks (ADP reported the largest corporate layoffs since early 2023 in November), confidence in economic resilience sustains low volatility.
JPMorgan Investment Management’s Priya Misra notes this reflects faith in "policy buffers" and a still-strong economy but warns: "What could change this is a clear rise in layoffs—jobs data may reveal greater recession risks not yet priced in. Another risk for bulls? A hawkish, fractured Fed worried about inflation."
Comments