Finance's 'fear index' spurred by coronavirus worries

Oscar Williams-GrutSenior City Correspondent, Yahoo Finance UK
Yahoo Finance UK
Brokers on the floor of the New York Stock Exchange. (Richard Drew/AP)
Brokers on the floor of the New York Stock Exchange. (Richard Drew/AP)

A closely watched measure of ‘fear’ in financial markets has risen sharply in the last few days, as investors panic about the potential economic impact of novel coronavirus.

The VIX (^VIX) index in Chicago has risen over 50% since Friday. The index, compiled by the Chicago Board Options Exchange (CBOE), is colloquially known as the ‘fear index’ because it acts as a proxy for investor expectations of falling prices.

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The index measures expectations of future volatility for the S&P 500 (^GSPC) stock market in the US. The VIX is based on the price of options contracts, which investors use as insurance against potential future losses.

The VIX climbed above 25 for the first time since April 2019 on Monday and passed 30 on Tuesday — the highest close since December 2018. It remained elevated on Wednesday, at 25.12.

The spike is down to the spread of coronavirus across Europe. A major outbreak in Italy began over the weekend and 14 European countries have now recorded at least one case of the virus, officially known as COVID-19.

The outbreak has stoked fears that the epidemic could be upgraded to a pandemic. Investors have concerns that efforts to contain the outbreak — such as travel bans, cancelled events, and calls for people to stay at home — will hobble corporate earnings and hit global economic growth.

The spike in the VIX corresponded with plummeting stock markets around the world. Over £100bn ($130bn) has been wiped off the value of the FTSE 100 (^FTSE) since the start of the week, while $1.7tn of notional value has been lost on the S&P 500.

Neil Wilson, chief market analyst at Markets.com, said the VIX worsened the stocks rout.

“A VIX spike like this always makes the selling worse as trading strategies and algos are programmed to sell hard into such moves in the 'fear gauge',” he said.

The elevated VIX level suggests investors think the sell-off has longer to run, even as losses moderated in Europe on Wednesday and US markets opened higher.

Wilson said the VIX at 18 would a signal investor fear had receded to normal levels.

“That's the cue for a merrier go round,” he said.

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