Volatility Tremors Spread After Tariff Shock

Derivative-market volumes surged following the announcement of global tariffs by the U.S. on April 2. On April 4, U.S. exchanges experienced a record-setting day, with over 100 million equity- and index-option contracts traded. This marked a near 20% increase from the previous record set earlier this year on Feb. 21, driven primarily by short-dated option contracts.¹ Both put and call option volumes peaked, reaching unprecedented levels of over 52 million and 48 million trades, respectively.

EM volatility levels slower to rise vs. US and EAFE, but soon caught up

Following this announcement, volatility spiked sharply across global markets. U.S. volatility, represented by the VIX, increased by 40%, while EAFE volatility (VXMXEA) rose by 24%, reflecting market surprise at the scale of the tariffs. Although initially muted, the impact on emerging markets (EM) volatility (VXMXEF) rose sharply the following day, climbing over 50% — possibly amplified by China's counter-tariff announcement and thus reflecting concerns about the global scale of the unfolding trade tensions.

Term-structure changes suggest higher risks priced in for the longer term

When looking at longer-maturity options (greater than 30 days), investor concerns were also reflected in the term structure of implied volatility, as seen by the unusual inversion across the U.S, EAFE and EM. Normally reflective of increasing uncertainty about longer-term economic conditions, this inversion became especially pronounced on April 4, especially in EM. The steepness of the term structure, as measured by the ratio of 91-day to 365-day implied volatility, rose above the 98th percentile across all three regions on that day, highlighting the exceptional nature of investor reactions.

As trade- and tariff-related uncertainties persist, investors globally are embedding these risks into their long-term expectations. The volatility and inversion of the volatility term structure reflect sustained market anxiety. Futures and options linked to MSCI Indexes can offer critical insights into evolving risk perceptions and can help inform hedging strategies in a market environment characterized by heightened geopolitical tensions and sustained volatility.

EM volatility played catchup with the US

EM equity-market volatility represented by the MSCI EM Volatility Index (VXMXEF). EAFE equity-market volatility represented by the MSCI EAFE Volatility Index (VXMXEA). U.S. equity-market volatility represented by the VIX Index. Source: CBOE

Elevated volatility across the term structure reflective of elevated risks

Options linked to the MSCI EAFE, MSCI Emerging Markets and S&P 500 Indexes were used to calculate term structure for the EAFE, EM and U.S. regions, respectively. Source: OptionMetrics, CBOE