A surge in the daily number of new COVID-19 cases in the U.S. has increased what was already high volatility in the S&P 500 with the closely watched CBOE volatility index up to the 96th percentile of its historical range.
Having closed at 33.4 on Oct. 28, the second-highest close in the four months since June 26, the VIX surged beyond 36 in early trading on Oct. 28. In the history of the index, 96% of VIX daily closing readings have been below 36.
The average absolute change in the S&P 500 on days following a VIX close near 30 is 1.3%.
"We still think there are plenty of reasons for investors to seek protection ahead of the U.S. elections given the myriad potential risks ahead," Win Thin, global head of currency strategy at Brown Brothers Harriman, wrote in a market commentary. "Between the virus resurgence in Europe, Brexit, and the rising geopolitical tensions rising in many places, it’s hard to see how anyone would have a strong risk-on conviction at this juncture."
Reported daily new COVID-19 cases are higher in the U.S. now than they were during the previous July peak while a second surge in Europe is sparking localized lockdowns. The S&P 500 dropped 2.2% across Oct. 26 and Oct. 27 and was trading down 2.9% as of 10:50 a.m. ET on Oct. 28.
"Uncertainty about COVID-19 related mobility restrictions and U.S. politics mean we should expect volatility to remain elevated for the balance of the year," Mark Haefele, chief investment officer of global wealth management at UBS, wrote in a market commentary. "However, we continue to see upside over the medium term, and target 3,700 on the S&P 500 by June 2021, around 9% higher than today's levels."
The unease in equities was not apparent in corporate bond markets.
The U.S. investment grade corporate bond index spread narrowed by 2 basis points between Oct. 19 and Oct. 26 to 130 bps, the lowest level since Feb. 29. The index has reversed 90.6% of the widening experienced in March when the coronavirus spread into financial markets.
Lower down the credit rating spectrum there was a widening of spreads. The U.S. high-yield corporate bond index spread rose 12 bps between Oct. 19 and Oct. 26 to 503 bps but was rising from an 8 month low and was still lower than at the beginning of October.
It was a calmer affair in the emerging market corporate bond market, with spreads ticking down by 1 basis point to 342 bps as of Oct. 26.
The Libor-OIS spread, a key risk indicator for the U.S. banking sector measuring the difference between the three-month dollar London interbank offered rate and the overnight indexed swap rate, was 12.3 bps as of Oct. 27, up from 11 bps on Oct. 20.
"We expect Libor-OIS to remain range-bound in the low to mid-teens with a modest risk skew toward widening over the coming months," Morgan Stanley research team wrote in a note led by rates strategist Kelcie Gerson.
In the leveraged loan market, the share of issues priced below 80 cents on the dollar, a closely watched indicator suggesting a company is more likely to default, fell to 4.9% on Oct. 26 from 5.2% on Oct. 19.