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Published: Mon, February 12, 2018
Economy | By Melissa Porter

The stock market's fear gauge spikes the most on recrod

The stock market's fear gauge spikes the most on recrod

"I am a bit surprised that we haven't seen the contagion effect on other markets and that makes me wary about the outlook in the near term", said Morgan Stanley's Redeker.

As stock markets around the world continue into their third day of plunges, the VIX has only been this high on three prior occasions. First, there is price volatility.

He said he believed the relatively smaller role of platforms like exchange traded funds versus stock markets had ensured better liquidity was available and held back rising volatility in foreign exchange markets.

Second, there is implied volatility. Indeed, three month implied volatility for the euro this week is well below 2017 highs. The financial press often mentions the VIX index when it talks about volatility.

The S&P 500 index recorded its biggest daily drop in over six years on Monday, and the VIX index shot up to its highest level since August 2015, breaking out of a historically low range.

A popular investment strategy for riding the unusual recent calm of global stock markets is suddenly in tatters.

The Cboe's Volatility Index, which measures investors' expectations of future stock price fluctuations and is commonly referred to as the "fear index", usually spikes during stock market crashes. Here are seven charts that put this move and the spike in volatility in context.

One trader's pain, however, is another's gain. The markets were placid and traders were sanguine.

The VIX surged by 115.6 percent on Monday to 37.32. The S&P last corrected in January 2016.

"There have been plenty of warnings over the past few weeks that equities were overvalued and that United States stock markets in particular were overheating". At one point on Monday, the Dow Jones Industrial Average dropped more than 6 percent inside of 6 minutes.

Davide Silvestrini, EMEA Head of global quantitative and derivatives strategy at JP Morgan, said the sharp losses experienced by short vol strategies will likely lead to reduced volatility selling flows from institutional investors.

Corrections are normal, healthy functions of the stock market.

UBS analysts estimate that a US equity decline of 7.4 percent, as seen over the last five working days, has historically been associated with a high yield spread widening of 75-80 basis points while the actual move has only been 21 basis points. As you do, try to keep perspective on the magnitude of any correction you face.

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