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Oct 15 2014, 8.55am GMT


The volatility index, Vix, for the U.S is at its highest since 2012 when the Euro crisis heightened fears. Vix, based on options prices for S&P 500 shares, was up 24.6 late on Monday, closing at 23.62 on Tuesday.

The markets in the US have taken a breather from the downward trend over the last three days but the volatility caused through the depreciation in global growth has taken the Vix past 20 points – figures last seen when the Euro crisis hit in 2012.

Volatility turns critical at 30 points usually due to an acute event as seen when Lehman Brothers folded and the Vix jumped to 80.1. In this event traders use calm times to sell high on long term futures and buy low on short term futures. As panic hits, the tendency is to buy short term and sell futures. 30 is usually the flip point when the term structure inverts.

Reasons for this volatility:

  • Global growth slowdown confirmed by IMF statement this past week.
  • Weak numbers in the Euro zone, specifically through the ZEW Indicator of Economic Sentiment down by 10.5 points, to -3.6 points, and sterling taking a beating from yesterday’s Consumer Prices Index (CPI) down from 1.5% to 1.2% in the year to September.
  • Fluctuations in global share price movements.
  • Banking institutions such as the ECB losing authority. Maris Draghi addressed this issue in his speech recently as he initialised a new programme, “In less than one month from now, the ECB will be assuming full responsibility for the micro-prudential supervision of all banks in the euro area and more directly by becoming the single supervisor of around 120 significant banks.”
  • The FED anticipating the end of its asset purchase scheme through the U.S QE programme and therefore losing influence over markets.

Asia ex-Japan is also a mixed bag laced with volatility: Shanghai Composite up 0.44%, Hang Seng 0.66%, Straits Times 0.1% and ASX 0.68% whilst KOSPI is down 0.1% and Sensex 0.13%.

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