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(BFM Bourse) – The financial world is won by panic, as evidenced by the explosion of the VIX – called “the fear index” – which jumped Friday to a level more observed since the crisis of “subprime” 2008.
How do you know if investors are concerned about the health of the global economy? A simple way is to look at the fluctuations of the aptly named “fear index”. At 49.10 points (+ 25.38%) Friday at 4.30 pm, the VIX (for “Volatiltily Index”) reached a peak since December 1, 2008 and the “subprime” crisis. As a sign of the extreme nervousness that has reigned on the markets since the start of the week, the index (calculated via the evolution of the volatility component of call and put options on maturities close to the S&P 500) has jumped by 187% since Monday.
More than nervousness, for Nicolas Chéron, head of market research for the broker Binck.fr, “fear is back”. A fear caused by the epidemic of coronavirus of which the last assessment reports of 83,800 people contaminated across fifty countries, for 2,867 deaths. In early afternoon Friday, WHO also raised the international threat to “very high”.
Only 5 times since 1990
The “hot flashes” to use the words of the Mirabaud Securities experts that the VIX experienced this week are all the more remarkable since the index which measures the level of fear on the markets had previously exceeded the threshold of 40 points only 4 times since its creation by the CBOE (Chicago Stock Exchange) in 1990.
In October 1998 during the collapse of the Russian markets (at 49.5 points) then in 2001 after the attacks on the World Trade Center (at 49 points), in 2002 with the Enron scandal (at 45 points) and therefore in 2008, during the subprime crisis in which the VIX reached its historic high of 80 points. Even during the Chinese crash of 2015 when the Shanghai Stock Exchange had lost a third of its value in a month, the VIX had not reacted as much.
A turning point for investors
Note that if the VIX has almost tripled since Monday, the VXN – the equivalent of the VIX for the Nasdaq – is not outdone. At 46.85 points just before 5.30 p.m. Friday, it soared 113% over the week and has been at a peak since 2008 too. With volatility at this level, “the market can go very quickly in one direction as in the other” warns Nicolas Chéron.
The stock market products from which the VIX is calculated value, by their fact that they are optional contracts, the uncertainties linked to the climate of fear or complacency of the markets with regard to risk. However, if the weakness of the fear index in recent years tends to prove that investors could feel invincible in markets that have experienced the longest “bull market” in history, it is not clearly no longer the case today.
Quentin Soubranne – © 2020 BFM Bourse
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