Europe's VIX broke back above 28% today, sending it to its highest level relative to US VIX since 2003 and almost three standard-deviations above its long-run norm. So what, we hear you cry - didn't you see European PMI and unemployment and the glorious ISM data in the US yesterday? To which we counter, US equities and European equities are not diverging dramatically, US investment grade credit and European investment grade credit are not diverging dramatically, and macro-economically the two regions have been trending down together in terms of negative surprises. We assume that VIX is holding relatively low to V2X (Europe's VIX) due to market expectations that The Fed will be first to flinch in the game of global thermonuclear money-printing war; however, until we see a significant drop in US equities (and therefore the implicit risk flare and rise in VIX), we suspect Bernanke is cornered. With VIX relatively 'cheap' to its realized vol (as we noted here [5]), perhaps Europe-US Vol-compression trade (ahead of NFP at least) is worth a look - or more simply if you are bullish Europe, sell vol (as its the richest asset) or bearish US, buy vol (as its the most out of line).
Short-term VIX vs V2X is dramatically divergent...
[6]
Long-term VIX vs V2X is almost 3 standard deviations divergent. This infers that US volatility (or in this case complacency) is near nine-year lows relative to Europe...
[7]
But US vs European stocks are not massively divergent...
[8]
and neither is US investment grade credit relative to European investment grade credit...
[9]
and at the same time US and European economic expectations are missing in the same trend - which may surprise many - but the point is that in the US we had higher hopes which are being dashed at the same pace as Europeans now...
[10]
Charts: Bloomberg