Risk assets may be bracing for increased turbulence as the Federal Reserve is widely anticipated to cut interest rates on September 17. This sentiment is reflected in futures tied to the VIX index, which measures expectations of volatility in the S&P 500 over the next month. Commonly referred to as Wall Street’s fear gauge, the VIX is calculated in real-time based on the prices of options on the S&P 500, revealing investor expectations for market fluctuations. Higher VIX values signify greater uncertainty in the market.
Recent data from TradingView indicates a notable widening of the spread between the October VIX futures contract and the September contract, reaching 2.2%, which is considered extreme by historical measures. The September contract is set to expire on the same day as the Fed meeting, which adds a layer of complexity to market dynamics. In contrast, the front-month VIX contract is trading at a slight premium to the cash index, suggesting a cautious approach from traders.
Greg Magadini, director of derivatives at crypto analytics firm Amberdata, pointed out in his weekly newsletter that traders appear to be betting on a stable market in the lead-up to the Fed’s decision, as the expectation of a rate cut could mitigate risk. The CME’s FedWatch tool suggests that the U.S. central bank is likely to lower its target rate by at least 25 basis points, with some market participants even factoring in a potential reduction of 50 basis points.
However, the October futures paint a different picture, indicating that investors are preparing for increased volatility following the Fed’s announcement. Magadini expressed concern that the relatively calm waters reflected in the September futures may give way to upheaval in October, suggesting that this could impact risk assets significantly.
Historically, the VIX has shown a strong negative correlation with stock prices, typically rising during periods of market stress and declining when equities are on the rise. This relationship suggests that a potential spike in volatility following the Fed’s decision could coincide with a downturn in stock prices.
The implications extend beyond equities, as Bitcoin—trading around $112,883—has been known to mirror Wall Street’s sentiment. A surge in market volatility may also trigger bearish price movements in the cryptocurrency market, which has shown increasing alignment with broader volatility trends. Since last November, the correlation between Bitcoin’s spot price and its 30-day implied volatility indices has turned negative, while Bitcoin’s own volatility indices—BVIV and DVOL—have reached record high correlations with the VIX.
As the market anticipates the September Fed meeting, all eyes are on how these developments could unfold, particularly concerning risk assets and their potential responses to anticipated decisions by central bank officials.
