As 2012 came to an end, we saw a spike in volatility, as was evident with VIX moving above the 20 mark. Now that we have started the New Year and a deal has been reached on the fiscal cliff a lot of volatility has been removed from the market. As a result the VIX has fallen and is currently just above 14.
While it is encouraging to see VIX moving lower, I believe this will be short lived, and expect to see another spike in volatility as focus is quickly shifting to the debt-ceiling debate.
The last time Washington tried to deal with the debt ceiling was back in the summer of 2011, and during that time we saw VIX spike all the way up above 45, and there is no reason why we should not expect to see another bounce during this round of negotiations.
The reasoning is pretty simple. While the fiscal cliff headlines spread fears of another recession, the headlines we will see in the months ahead will much more dire. Its one thing to fall into a recession, but it’s a completely different thing to hear that the country is not going to be able to pay its debts.