Pulses head skyward as frightened investors try to make sense of mayhem
THERE is a somewhat arcane measure of financial market stability known as the VIX, or “volatility index”.
In simple terms it reflects positions being taken in the options markets that reflect investor expectations of market movements. Some refer to it as the “investor fear gauge”.
Right now the VIX is off the charts, reaching levels not seen since the early days of the global financial crisis nearly seven years ago. In fact when Wall Street opened overnight on Monday the panic was such that the index was not so much off the charts as off line altogether with anxiety levels actually too high to measure.
This was reflected in trading yesterday, with the local sharemarket initially tumbling sharply before staging a strong recovery.
The story was the same around the region. China – which is the epicentre of this latest panic attack – fell precipitously (more than 6 per cent at the open), before bouncing back and then plummeting again in late trade to be more than 7 per cent down.
Some market watchers put the latest rout down to traders thinking a new paradigm might be at play in China, in that the era of massive government intervention to prop up markets might be ending. China did pump another US$23 billion of liquidity into markets and devalued its currency again yesterday morning, but many observers see authorities fighting a losing battle when it comes to supporting a market which is clearly overvalued, particularly amid a wider global sell-off.
Add to this worries about the growth trajectory of the Chinese economy (which accounts for about 15 per cent of global GDP), the falling commodity prices that brings with it and the opaque nature of policy in China’s quasi freemarket model, and you have a recipe for prolonged market instability.
In that equation Australia is just collateral damage.