The Chicago Board of Exchange’s volatility index, simply known as VIX, flickered into risk-off territory (i.e., above 20) on Friday, for the first time since the 7 October attacks on Israel — reminding us yet again how fragile the markets are and by association the global economy when threatened by geopolitical risks. The latest up-tick is due to the exchange of deadly projectiles between Iran and Israel – the first time these long-time adversaries have attacked one another directly rather than through proxies. This face-off adds to the current tally of tensions and conflicts that may present a downside risk to growth and asset prices. Scrutinising the changes in VIX around these tense periods provides an approximation for the pricing of that downside risk. As the chart shows, VIX has been known to rise by as much as 40 percentage points and fall by up to 18 percentage points within the first ten days of a conflict starting. Although the tit-for-tat attacks between Iran and Israel have not produced quite so dramatic a movement, they threaten to drag on, as do the wars in Gaza and Ukraine — with an ever-present risk of escalation in all cases that could potentially derail the global recovery from the pandemic and from runaway inflation. Events in the coming weeks will determine how high VIX could go, driving with it the prices of precious metals and oil.
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