VIX, Global Volatility Gauges Soar After S&P Lowers U.S. Rating

Volatility indexes soared around the world, lifting the VIX for a third day and sending Europe’s gauge toward a record ninth-straight gain, after Standard & Poor’s stripped the U.S. of its top credit rating.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, advanced 11 percent to 35.45 at 9:42 a.m. in New York. Europe’s VStoxx Index climbed 8.7 percent to 42.68 and Hong Kong’s HSI Volatility Index advanced 6.1 percent to 35.93, both rising to the highest since May 2010. Korea’s Kospi 200 Volatility Index surged as much as 59 percent for the biggest intraday gain in its eight-year history. The India VIX rose 16 percent to 28.78, its highest level since June 2010.

“We’re in one of the most interesting times in financial history and everyone is grasping for something to hold onto but no one knows, because this is unprecedented,” Brenna Hardman, a derivatives broker at MEB Options LLC, said in a telephone interview from the CBOE floor. “You’re going to see the market whip around quite a bit as everyone looks for leadership. The market is so sensitive right now.”

Stocks tumbled from Hong Kong to Mumbai and Frankfurt, sending benchmark Asian and European indexes down as much as 20 percent from their peaks, as the U.S. downgrade, coupled with a deepening euro-region sovereign debt crisis, lifted demand for options to protect stocks from more losses. Morgan Stanley, the sixth largest U.S. bank by assets, said the cut may have a “material adverse” impact on financial markets.

S&P Downgrade

S&P lowered the long-term credit rating of the world’s largest economy to AA+ from AAA after U.S. equity markets closed on Aug. 5. S&P said it cut the credit rating because a deal struck last week to raise the federal debt ceiling and cut the budget didn’t go far enough and the agency now believes the political divide in Washington is such that meaningful progress on debt-reduction is less likely than previously assumed.

The S&P 500 tumbled 1.7 percent to 1,179.30 on concern consumer and business confidence will deteriorate. The Stoxx Europe 600 Index dropped 2 percent to 234.10. The MSCI Asia Pacific Index, which entered a so-called correction last week after falling more than 10 percent from a May peak, lost 2.6 percent to 122.84.

“We’re in for another stomach-churning week,” Nick Maroutsos, a Sydney-based money manager who oversees the equivalent of about $4 billion at Kapstream Capital, said on Bloomberg Television’s “First Up” with Susan Li today. “This is a life-changing event in many respects because no-one has ever seen the U.S. have a double-A status. We’re going to see a lot of volatility this week.”

Volatility soared last week before the credit-rating cut as investors snapped up options to protect stocks amid growing concern the U.S. may slip into a recession and that Europe can’t contain its sovereign-debt crisis.

Volatility Spikes

“Sovereign U.S. debt rating changes will feed into the high volatility that we are in,” Gaurav Mehta, a derivatives analyst at Mumbai-based brokerage Ambit Capital, said in a telephone interview. “We expect India VIX to spike all the way to 35.”

The measure of Indian option prices has averaged 20.73 over the past year, according to Bloomberg data.

The HSI Volatility Index of options of the Hang Seng Index surged 56 percent on Aug. 5, the biggest one-day gain in its decade-long history. The gauge has almost doubled in the past week. The VStoxx Index (V2X) of Euro Stoxx 50 options prices extended its longest rising streak on record after jumping 42 percent last week. The European stock index today fell 2 percent for a record 11th straight day of loss.

Former Federal Reserve Chairman Alan Greenspan said yesterday he expects stocks will keep slumping after S&P cut the U.S. credit rating.

“Considering the momentum in which the market went down over the last week, it is very unlikely, if history is any guide, that this isn’t going to take a while to bottom out,” Greenspan told NBC’s “Meet the Press” program.

U.S. stocks have slumped for two straight weeks as reports on manufacturing and consumer spending showed the world’s largest economy is slowing. The S&P 500 has retreated 11 percent since July 22, the biggest loss over the same amount of time since March 2009, when the equity bull market began.

More than 39 million options on stocks, indexes and exchange-traded funds changed hands on U.S. exchanges on Aug. 5, according to a preliminary tally by the Chicago-based OCC, which settles all trades. That topped an Aug. 4 record of 36.1 million contracts and a prior high before this week of 30.8 million on May 6, 2010, when a 20-minute rout erased $862 billion from the value of U.S. shares before stocks rebounded.

To contact the reporters on this story: Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net; Jeff Kearns in New York at jkearns3@bloomberg.net; Cecile Vannucci in Amsterdam at cvannucci1@bloomberg.net.

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net.

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