VIX Index outlook dims as the bank crisis contagion fades

The VIX index (VIX) has pulled back in the past few days as concerns about the banking industry cool. It dropped to a low of $22 on Friday, which was ~30% below the highest point in March. This decline has coincided with the slow recovery of key American indices like the S&p 500 and Nasdaq 100.

March Madness eases

The banking crisis seems to be easing, judging by the recent performance of stocks in the industry. On Friday, I wrote that bank stocks, led by Deutsche Bank, dropped sharply as their credit default swaps (CDS) jumped sharply.

However, these declines were relatively short-lived as most of these stocks pulled back. In the US, Deutsche Bank shares ended down by about 3% after falling by ~10% during the open. The same trend happened in other European and American banks.

The likely conclusion among investors was that the banking crisis will likely not be contagious. Besides, all banks that failed in March had key internal issues. Credit Suisse was moving from one scandal to another while Silicon Valley Bank (SVB) and Signature had exposure to tech and crypto industries. 

Still, there will likely be several key volatility factors this week, which is evidenced by the performance of the Swiss franc and Japanese yen. For one, there are geopolitical factors after Putin decided to place tactical nuclear weapons in Belarus.

The other catalyst for volatility and the VIX index is the First Republic Bank (FRC), which has been in trouble. FRC stock dropped by more than 46% last week as regulator and other banks rushed to save it. Its collapse could have a major impact considering that big US banks deposited $30 billion in it this month.

Volatility in the bond market has also cooled, with the 10-year and 2-year yields being at 3.37% and 3.7%, respectively.

VIX index forecast

VIX chart by TradingView

The daily chart reveals that the CBOE VIX index has dropped sharply in the past few days. This decline has brought it to the 50-day and 100-day exponential moving averages (EMA). The Relative Strength Index (RSI) has moved below the neutral point at 50.

Therefore, the VIX will likely continue falling this week as a sense of calm continues in the market. This trend could see it drop below $20 as sellers target the year-to-date low of $17.47.