VIX to fall back toward 20 as current volatility environment is transitory – SocGen

At the moment, equity volatility is very high amid Omicron newsflow, a perception that the Fed has become more hawkish, tight liquidity, and end-of-year book cleaning and hedging. Economists at Société Générale forecast the VIX at 20 (-1.9%) in their base case scenario. In the upside scenario, the VIX would stabilise at 15 as volatility would be sold to chase the elevated implied-to-realised volatility premium while the VIX would rise to 35 in the downside scenario.

Base case for 2Q22 (50% probability) 

“VIX at 20. We see the current volatility environment as transitory. We expect the disconnection between short-term realised volatility and the VIX to widen until the VIX starts normalising toward levels more in line with the true macro and micro economic landscape. The high level of uncertainty surrounding the rates complex could continue to act as an equity volatility suppressor through the channel of low stock correlation. The impact of rising inflation should not be too overstated as equity markets tend to be resilient in inflationary environments. We expect the VIX to move back toward 20.”

Upside scenario for 2Q22 (25% probability) 

“VIX at 15. Equity volatility would normalise at a faster pace. This move would be driven by increasingly bullish sentiment, a return to fashion of short equity volatility strategies to harvest the hefty volatility premium (implied to realised spread), improved liquidity conditions and a low correlation between stocks in an environment of rising yields.”

Downside scenario for 2Q22 (25% probability)

“VIX at 35. With new lockdowns restraining economies worldwide, we see the VIX moving toward 35. A worsening credit environment would be the main transmission channel for risk repricing while rising hedging demand would impact skew and convexity. The expected drying up of liquidity in derivatives would act as an additional catalyst, in particular in European markets. In a second step, monetary and fiscal policy would likely come to the rescue and keep volatility at high but not crazy levels.”