Wall Street's volatility index, known as the "fear index," or Vix, spiked to its highest level since the height of the euro zone crisis in 2012 as investors took fright, unloaded European equities and piled into sovereign bonds.
The trades were triggered by rising fears that the global economy is slowing down quickly – telegraphed by plunging oil prices – that Ebola could spread at an alarming rate and that the withdrawal of the U.S. Federal Reserve's quantitative easing program will leave the markets even more vulnerable.
Weaker than expected U.S. retail sales, down 0.3 per cent in September, did not help investor sentiment.
Jens Nordvig, Nomura's head of fixed-income research, said "there is no doubt that many investors seem to be in full-on risk reduction mode."
The CBOE's Vix index spiked to 24, indicating high, though not extreme, volatility. Anything below 15 indicates no fear; a reading above 25 generally indicates high risk. The Vix, however, is still well below the levels reached a few weeks after Lehman Bros. collapsed in 2008, reaching a record high of almost 81.
European stock markets were a sea of red, with benchmark indexes falling between 2 per cent and 4 per cent. In London, the FTSE 100 was off 2.5 per cent while the Euro Stoxx 50, representing the biggest companies in the euro zone, lost 3.1 per cent.
The fear factor pushed investors into sovereign bonds in what was, apparently, a classic flight to quality. In Europe, yields – the cost of borrowing – fell. Germany bund yields hit a record low of 0.84 per cent. British yields dipped below 2 per cent. The notable exception was Greece, whose yields have been climbing on doubts that its desire for an early exit from its bailout program can succeed.
The market upheaval drove the yield on 10-year U.S. Treasuries below 2 per cent. At one point, the yield was off 34 basis points (100 basis points equals 1 percentage point), marking the biggest fall since the spring of 2009, when the financial crisis in full swing.
The fear of economic slowdowns in emerging markets and in the euro zone, which may be on the verge of a triple-dip recession, put more pressure on commodities. Brent oil and West Texas Intermediate tried to rally, but failed and fell slightly. Brent is now trading at about $84.60 (U.S.). It has fallen in six of the last seven trading days. WTI dipped half a percentage point to about $81.30.
There is no shortage of traders who think oil prices could fall below $80. OPEC, the oil exporting cartel led by Saudi Arabia, has signaled that it will not use the Nov. 27 members' meeting in Vienna to tighten up supplies. Some analysts think OPEC is bent on driving the price down to choke off U.S. shale oil production, which is challenging Saudi Arabia's status as the leading oil producer.
In spite of the flight to bonds, some economists and analysts are not convinced economic deterioration will accelerate. The American and British economies are holding up well, as are the banks as other investments fall.
Falling oil prices are generally bullish for economies. The price fall could have as much to do with surging supply from the United States and Libya as the weakening growth outlook. Falling prices can act as a global form of quantitative easing, putting money in consumers' pockets as the cost of gasoline, diesel and home heating decline. Mr. Nordvig said "the Eurozone and the U.S. will see consumption potentially boosted by this dynamic."