Skip to main content

International Business ‘Fear index’ spikes as investors unload European stocks

People pass electronic information boards at the London Stock Exchange in London on Oct. 11, 2013.

Stefan Wermuth/Reuters

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.

Story continues below advertisement

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.

Story continues below advertisement

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."

Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter