Independence Day Market Dynamics

Despite the continued strength in equities, the volatility complex remains resilient.

On Independence Day, the S&P 500 advanced by 0.73%, yet the front end of the volatility curve barely moved lower. This is noteworthy: roll yield is carrying materially better than expected given the steepness of the curve.

The chart below illustrates the 1-day change in VXW against SPX returns, with the most recent data point highlighted. Short-term beta remains elevated and highly reactive — volatility is responding disproportionately even to modest moves in the index.

Chart 1 — 1-day change in VXW against SPX returns

From a positioning perspective, one might have expected volatility to compress more decisively at these higher SPX levels. Instead, the current term structure looks more consistent with a VIX in the 12s, while spot VIX continues to hold in the mid-16s.

In our view, the market remains caught between two competing forces:

• Seasonal softness in realised volatility, which typically exerts downward pressure on implieds;

• Persistent macro risk premium embedded in the curve, reflecting investor hedging demand and ongoing uncertainty.

The result is a volatility market that continues to carry better than expected, given both the level of the index and the shape of the curve.