What matters more, the war or the Fed?

An unusual divergence has appeared between the VIX Index and MOVE, which measures the implied volatility of the bond market. While MOVE has spiked, VIX has fallen. 

The difference in the two indicators can be explained by two forces that affect markets today, namely geopolitical risk and macro risk as defined by the Fed cycle. The decline in the VIX and equity rally reflects a compression in geopolitical risk premium in light of constructive Russia-Ukraine discussions, while the elevated nature of the MOVE Index reflects the market's concerns about the Fed's tightening cycle.

I pointed out a month ago that Wars are equity bullish, but there's a catch. History shows that stock markets have recovered from sudden geopolitical shocks, with the exception that the war or insurrection results in a permanent loss of capital. It is therefore no surprise that stock prices advanced as the Russia-Ukraine risk premium faded. 

Here is a framework to consider. In the short-term, geopolitical risk will continue to dominate market volatility. Longer-term, it is the Fed cycle that matters to stock prices.

The full post can be found here.