Whereas most measures of stress in financial markets have flattened, albeit at elevated levels compared to pre-coronavirus, the heightened volatility in U.S. equities is the clearest signal of insecurity among investors.
The CBOE Volatility Index, or VIX, rose 4.9 points on July 13 to 32.2, the largest single-day rise in the so-called fear gauge since June 11, amid increasing COVID-19 cases in southern and western U.S. states and worsening Sino-American relations.
The VIX — a measure of expected volatility on the S&P 500 — fell back to 29.5 on July 14 but remained higher than the 90th percentile level of 28.7 and more than double the 13.9 it averaged in January.
"The earnings season should result in more volatility," Mathieu Savary, a strategist at BCA Research, wrote in a research note. "The churning pattern for stocks will continue over the coming months, especially as more swaths of the economy are again entering into lockdown."
Despite an historic economic slump and the expectation that the coming weeks will reveal a collapse in earnings, the S&P 500 has rebounded 42.9% since its March 23 trough. With the Federal Reserve appearing ready to provide unlimited support, the rally could keep on rolling.
"While we believe negative news on the pandemic and geopolitics will contribute to volatility, we think equities can continue to trend higher," UBS Global Wealth Management’s Chief Investment Officer Mark Haefele wrote in a research note.
By contrast, it was a quiet week in the corporate credit markets.
The U.S. investment grade bond spread narrowed 2 basis points between July 6 and July 13 to 150 bps, continuing its recent theme of gradually edging lower. The spread has now unwound 83.9% of the trough-to-peak widening during the height of the panic in financial markets in late February and March.
"Given that we are likely to be in this low-rate environment for the foreseeable future, investors will look to the credit markets for incremental yield to target more attractive returns," wrote David Norris, head of U.S. credit at TwentyFour Asset Management.
It was a similar story in the high-yield market.
The spread in the U.S. high-yield corporate bond market fell 2 bps to 601 bps in the seven-day period through July 13, the lowest since June 17. The spread has reversed 66.6% of the widening caused by the coronavirus-induced lockdowns.
The emerging market corporate spread was down 1 basis point to 391 bps, retracing 63.6% of the pandemic's effect.
The Libor-OIS spread, a key risk indicator for the U.S. banking sector, fell slightly in the week and is now at lower levels than in January suggesting the ill effects of the coronavirus are over.
The spread, which measures the difference between the three-month dollar London interbank offered rate, and the overnight indexed swap rate, was 17.8 bps as of July 14, down from 18.2 bps on July 7.
In the leveraged loan market, the percentage of companies priced below 80.0 — a closely watched indicator suggesting a company is more likely to default — has been rangebound between 7.5% and 8.5% since June 19.
The level increased from 7.8% on July 6 to 8.3% on July 17.