A very unusual technical event occurred during the recent stock market correction, as volatility returned to equities markets.
For four consecutive days the VIX, which measures volatility in the S&P 500, rose above the OVX, which measures volatility on crude oil options. According to the EIA, the VIX has only closed higher than the OVX four other times since the inception of the OVX in 2007; all previous instances were in 2008.
Source: EIA
The market correction did spill into oil prices, but to a much lesser degree. Under normal conditions, the OVX would be expected to be higher than the VIX, if for no other reason than that the OVX examines a single commodity while the VIX examines a basket of 500 companies across varying industries.
Both the VIX and OVX were generally in decline from 2016 to 2018, with only events like the announcement of the OPEC cut deal causing major spikes. The February correction led to an increase in oil volatility, but only represented a small change.
Source: EIA
While markets have since recovered from the February correction, volatility has not disappeared. Both the VIX and OVX are currently higher than at the beginning of the year, and the VIX is higher than all but a handful of days in 2017. For the moment, at least, volatility has returned to the markets.
Source: EIA
While crude and equity markets often move independently, as factors specific to each market exert influence, WTI and the S&P 500 are typically positively correlated. For most of late 2017, however, WTI and the S&P 500 had essentially no correlation. The relationship returned somewhat in the past month, reaching a correlation of 0.38 on March 9.
Things noticed by the Fed
The cause of this return is unclear, but some considerations do affect both oil and equity markets. Inflation data from the past month showed rising inflationary pressure, which has been noticed by the Federal Reserve. Recent employment and wage data indicates earnings are increasing, which could also contribute to higher inflation. This information could lead the Fed to tighten monetary policy, an action that will ripple through virtually all asset markets.
