Volatility Indexes Jump as European Sovereign Debt Crisis Infects Asia

Volatility indexes show Europe’s fiscal crisis is jolting markets in Asia’s largest economies, with gauges in China and India jumping as much as in the U.K.

The AlphaShares Chinese Volatility Index, a measure of implied volatility on stock exchanges in China and Hong Kong, has risen 13 percent this week after Standard & Poor’s cut Greece’s credit rating to junk and downgraded Portugal, mirroring the similar measure of investor sentiment in Britain.

India’s VIX index jumped 15 percent on April 28, the day after the downgrades, and yesterday fell 7 percent. The indexes are based on options prices, and assess near-term expectations for the magnitude and rate of price moves.

“When markets react to a big spike in stress they look at simple indicators like a country’s debt to gross domestic product,” Sebastien Barbe, head of emerging-market research for Credit Agricole CIB, said in a phone interview from Hong Kong. “India doesn’t have any dollar debt, but it does have huge local-currency debt.”

India, Asia’s third-biggest economy after Japan and China, has pledged to cut its budget deficit to 5.5 percent of GDP in the year starting April 1, from 6.9 percent last year. At 13.6 percent, Greece’s budget shortfall is more than four times the European Union’s limit.

Almost $1 trillion of worldwide equity value was erased after S&P downgraded Greece, on concern Europe’s debt crisis may derail the global recovery, data compiled by Bloomberg show.

Greece, China

Greece ranks one level below India at BB+, the highest speculative-grade. S&P rates China, the world’s fastest-growing major economy, A+, the fifth-highest investment-grade.

China, which with $877.5 billion of Treasuries is the world’s biggest holder of U.S. debt, is subject to “compounding factors” such as overheating property, according to Vijay Chander, head of credit strategy at Standard Chartered Plc in Hong Kong.

“China has its own set of domestic problems and its stock markets are susceptible to bouts of selling on real-estate bubble fears,” Chander said in a telephone interview. “Markets in Shanghai haven’t topped their August 2009 levels and that’s not true of India, which has held up a lot better.”

China’s government has raised mortgage rates and down- payment ratios, barred lending for third-home purchases and ordered tighter scrutiny of developer financing to avert a property bubble. The Shanghai Composite Index has fallen 13 percent this year, and was down 1 percent at 2,842.81 today. It hit 3,471.44 on Aug. 4, its highest since May 2008.

It’s likely both China and India volatility indexes will continue to track moves in Europe, Credit Agricole’s Barbe said. “What’s driving markets currently is fear of another wave of global de-leveraging, and that could have big ramifications for a lot of emerging markets.”

To contact the reporter on this story: Katrina Nicholas in Singapore at knicholas2@bloomberg.net

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