Global Markets Enter Unprecedented Low Volatility, Could Signal a Violent Shift

Monday's global markets were akin to the calm before a storm. U.S. stocks closed slightly higher, with the dollar, gold, and U.S. treasuries all edging lower in tandem. Gold closed below $4,700, while oil bucked the trend by closing higher.

More noteworthy is that the implied volatility of gold, oil, and U.S. stocks has nearly halved compared to last Friday.

The VIX has fallen below 20. Considering the ongoing Middle East conflict and the partial blockade of the Strait of Hormuz, the market's risk pricing for geonational risks at such levels is itself a dangerous signal.

Market Focus on Iran and the Federal Reserve

Yesterday, Iran put forward a temporary agreement proposal at the window when U.S. stock liquidity was most abundant, in exchange for the U.S. lifting the naval blockade and postponing nuclear talks in order to reopen the strait.

This news precisely hit the market's "long volatility" positions, forcing a large amount of capital prepared to bet on an escalation of conflict to close positions and wait and see, causing volatility to collapse.

Trump did not directly refuse but was cold in response, with the White House expected to propose a counterproposal within a few days. This Friday could be the tipping point for the next wave of news.

Additionally, in the early hours of Thursday, Federal Reserve Chairman Powell will preside over the last FOMC meeting of his term. The market's core speculation is not about the interest rates themselves, but rather Powell's tone. Will he choose to finish with a hawkish stance, setting a baseline for fighting inflation for his successor, or will he complete the power transition with a gentle demeanor?

Beware of the Next 2018 "Volatility Apocalypse"

What truly alarms quantitative strategists is a deep structural indicator: the average pairwise correlation coefficient of S&P 500 constituents and the correlation between sectors and factors has fallen to an extreme low. Historical data shows that the last time correlations were lower than they are now was at the beginning of 2018—on the eve of the outbreak of "Volmageddon."

The script from that time is still terrifying. On February 5, 2018, U.S. stocks plummeted by 4% in a single day, and VIX, which was in the teens, once soared past 50. The short volatility inverse ETF products were subject to destructive liquidation within a few hours, with the XIV fund going to zero overnight.

The logic chain at the time was clear and deadly: low volatility attracted speculators to sell more volatility → positions became increasingly crowded → any shock would cause a sudden increase in correlation → VIX nonlinear spike → short sellers were forced to cover → a stampede-style crash.

Shocks Can Trigger a Steep Decline in Stock Prices

The short volatility instruments of 2018—XIV, SVXY, and other inverse VIX ETFs—have essentially exited the stage, but this does not mean that the risk has dissipated. It has merely taken on a different form: systematic selling of put options, algorithmic strategies, volatility-weighted portfolio allocation risk-parity funds, and volatility dispersion trading, which have been popular in recent years, together form a hidden, large-scale "short volatility" position pool.

Mathematically, VIX is the product of the average volatility of individual stocks and correlation coefficients. Currently, individual stock volatility is not low, but extremely low correlation artificially suppresses index volatility at a low level.

This means that once a common shock forces all stocks to move in the same direction, whether it is a missile, a hawkish statement, or an unexpected economic data release, correlation will instantly skyrocket, VIX will be impulsively raised, and stock prices will plummet in a disorderly, nonlinear manner.

The current low volatility in the market is not a reflection of confidence but a temporary resolution of differences.

In this state where the spring is compressed to the limit, what needs to be vigilant is not only real shocks but also a low-volume buying pulse that may occur before Thursday's early hours, using extremely low volatility and sparse liquidity to attract the last group of retail investors, providing fuel for the subsequent market shift.