Volatility gauges jump as tariff threats spook investors

Impact of Tariff Threats on Market Volatility

By Saqib Iqbal Ahmed

Investor Reactions and Risk Metrics

NEW YORK, Jan 20 (Reuters) - Volatility measures across asset classes rose on Tuesday as stocks, U.S. long-dated Treasuries, and the U.S. dollar sold off sharply after President Donald Trump threatened to rekindle a trade war with Europe.

Currency Market Trends

On Monday, Trump's renewed tariff threats against European allies prompted a repeat of the so-called "Sell America" trade that emerged following last year's "Liberation Day" tariff announcement in April, with investors shying away from U.S. assets.

Future Volatility Expectations

Wall Street's most-watched gauge of investor anxiety, the Cboe Volatility Index, jumped as much as 1.9 points to an eight-week high of 20.69. The options-based index was last up 1.3 points to 20.12. The S&P 500 Index was down 1.5% at 6,838.

"We've certainly seen a meaningful reaction in the risk metrics, since Friday ... it's a very significant shift," said Jim Carroll, senior wealth adviser and portfolio manager at Ballast Rock Private Wealth in Charleston, South Carolina.

"But it's not, you know, hair on fire, kind of reaction at this point," he said.

Some analysts had warned about a pickup in market volatility this week following the monthly equity options expiration on Friday. 

In currency markets, the safe-haven dollar found few takers. It slipped 0.6% against a basket of peers to a more than two-week low. 

Even with Tuesday's surge in market volatility, investor expectations for FX fluctuations remained low by historical standards.

"I suppose the moves 'feel' more severe than they might be in reality, simply since the market has been so moribund for so long now," said Michael Brown, market analyst at online broker Pepperstone in London.

One-month implied volatility for the euro jumped to its highest since November 24 at 6.03%, but was still well below its 52-week average reading of 7.1%, according to LSEG data.

"You'd argue, on that basis, that there is hence room for volatility to continue to rise, especially if this week doesn't yield much in terms of concrete progress towards Trump unwinding his latest tariff threat, and some off-ramps being found," Brown said.

(Reporting by Saqib Iqbal Ahmed. Editing by Mark Potter)