The FOMC language was slightly more dovish than expected causing US equity investors to breathe a sigh of relief. The S&P 500 rallied 1.5% from mid-Wednesday to Thursday following the release of the statement. Tsipras pushed Greece to the brink of default as his political antics are no longer a laughing matter. The probability of a negative outcome is now becoming consensus. Yet, US equity volatility is nowhere to be found. The VIX stands at 14 and SPX implied volatility only crept above 12 on Friday. The general ambivalence towards the situation in Greece by US equity investors has been extremely interesting. US investors are either asleep at the wheel and are ignoring what is appearing to be a more and more likely outcome, or they simple don’t care.
We get concerned anytime asset classes are making starkly contrasting statements about the future. We think the US equity markets are pricing in zero risk from this event, which is causing the largest divergence in V2X (Eurostoxx VIX equivalent) vs. VIX since 2011. Is the US truly siloed from the potential fallout of a Greek default and Grexit? We don’t think so. We think there will be a meaningful move lower in US equities irrespective of the outcome in Greece. We think it is time to strap in for what we expect to be an exciting second half of 2015.