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'Gulp': What happens when market fear gauge spikes like it has this year

Briefing highlights

  • What happens when VIX spikes
  • Markets, Canadian dollar at a glance
  • China raises key interest rate
  • AutoCanada expands into U.S.,

When the VIX spikes

David Rosenberg would like to draw your attention to a measure commonly known as the fear gauge.

Most importantly, as the chief economist at Gluskin Sheff + Associates notes, is how much it has spiked this year, and how such a jolt has affected markets in the past.

"As we have said recently, the VIX index is up more than 50 per cent this year, the first time this has happened since 2008 (gulp)," Mr. Rosenberg said in a report to clients this week.

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"This is a very useful signpost of regime change in the marketplace – that we are transitioning out of the bull phase and, at best, into a sideways pattern peppered with wide fluctuations in market prices."

He was referring to the Chicago Board Options Exchange Volatility Index, commonly known as the VIX for its ticker symbol. Also known as the fear gauge or index because it measures how volatile investors expect the market to be in the short term, it jumped markedly during the stock turmoil of earlier this year.

Mr. Rosenberg tracked the VIX through several troubling episodes, including the mid-1990s Orange County bankruptcy and Mexican woes, 1997's Asian crisis, the dot-com metldown, the 2011 downgrade of U.S. debt, China's currency devaluation of a few years ago and, of course, America's housing crash and global financial mess.

When the VIX is low and falling, "the bull market is fully intact," Mr. Rosenberg said.

"But when the VIX rises and enters into a new and higher range, it means regime change – that a shift of secular or long-term significance is at hand, and that we should be prepared for more turbulence and heightened economic risks."

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Markets at a glance

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China raises key rate

China's central bank raised a benchmark interest rate today, but Capital Economics says it's all pretense.

"For the second time since December, the People's Bank has responded to a Fed rate hike by raising the rates it charges when providing funds in China's interbank market," said Julian Evans-Pritchard, senior China economist at Capital Economics.

"But contrary to perceptions, it is actually loosening monetary conditions at the same time by making these funds more readily available."

Following the Fed by a day, the People's Bank of China raised the rate on seven-day reverse repurchase agreements by five basis points. But, Mr. Evans-Pritchard said, the central bank "rations the liquidity it provides" through how it lends.

"Of course, the timing of the PBOC moves - the day after Fed hikes - suggests that they are driven by more than just a desire to narrow the gap between policy rates and market rates," he said.

"Our best guess is that the second motivation for the hikes is simply to give the impression of following the Fed, in order to try to minimize capital outflows and downward pressure on the renminbi."

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