Volatility gauges surged worldwide after Citigroup Inc. (C) cut forecasts for U.S. economic growth and concern intensified that the global expansion is weakening.
The VIX, as the Chicago Board Options Exchange Volatility Index is known, rose 4.1 percent to 44.43 at 9:52 a.m. in New York. The VStoxx Index (V2X), which measures the cost of Euro Stoxx 50 Index options, gained 1.9 percent to 48.07 after earlier advancing as much as 19 percent. Volatility indexes from South Korea to Hong Kong to India also increased.
“It’s a confidence crisis,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a telephone interview. His firm manages $278 billion. “The fear is that we’re going into a recession and that we have a dysfunctional government.”
Citigroup cut its forecasts for expansion in the world’s largest economy after Morgan Stanley also lowered its global growth projection to 3.9 percent from 4.2 percent. Regulators from the U.S., South Korea and Sweden said the market turmoil posed further risks to growth, after reports yesterday showed American jobless claims rose and Philadelphia-area manufacturing shrank by the most since 2009.
The U.S. economy may expand less than previously forecast in 2011 and 2012 because of potential “political paralysis” and fiscal-tightening steps, Citigroup wrote in a report dated yesterday. The brokerage cut its 2011 gross domestic product growth forecast to 1.6 percent from 1.7 percent and lowered its 2012 GDP growth estimate to 2.1 percent from 2.7 percent.
European, Asian Stocks
The Stoxx Europe 600 Index fell 1.7 percent after yesterday tumbling 4.8 percent, the most since March 2009. The gauge sank 22 percent from this year’s Feb. 17 peak through yesterday amid concern that Europe will fail to contain its sovereign-debt crisis and that the economic recovery in the U.S. will falter.
Implied volatility for Commerzbank AG (CBK) options with a strike at the stock price expiring in 30 days rose to a two-year high of 99.14 after jumping 28 percent yesterday. ING Groep NV (INGA)’s implied volatility rose to 81.02 from 76.65 yesterday.
“There were lots of buyers of put protection,” said Sebastien Krol, a director at Mariana Capital Markets Ltd., a London-based brokerage firm specializing in equity derivatives. “That’s really a measure of fear in the market. If the market goes down and people are buying puts, that’s going to increase the downside volatility and that suggests there is some panic.”
Hong Kong’s HSI Volatility Index jumped 31 percent, the most in almost two weeks, to 40.18. The Kospi 200 Volatility Index of South Korea option prices climbed 35 percent to 41.91. The India VIX, which gauges the cost of buying protection against losses in the S&P CNX Nifty Index, advanced 6.3 percent to 29.19.
The MSCI Asia Pacific Index of stocks fell 3 percent, giving it a 2.1 percent loss for the week. The Hang Seng Index (HSI) slid 3.1 percent, while the Kospi 200 Index (KOSPI2) tumbled 6.4 percent, the most since November 2008. The Standard & Poor’s 500 Index plunged 4.5 percent yesterday.
“Investors are fearful,” said Khiem Do, the Hong Kong- based head of multi-asset strategy at Baring Asset Management, which oversees about $10 billion. “The U.S. economy, showing signs of slowing down, has brought down our markets significantly. Sentiment is bearish, and in times like these, investors should think about long-term investments.”
The VIX, which gauges the cost of S&P 500 options, jumped 35 percent to 42.67 yesterday for the third-highest close of 2011. VIX futures expiring in September gained 4.3 percent to 34.85 today.
The VIX surged 50 percent to 48 on Aug. 8 for the biggest jump since February 2007, while the VStoxx climbed to its highest level since May 2010 on Aug. 10. The volatility benchmark for U.S. equities has averaged 20.37 in its 21-year history, and the VStoxx average has been 25.98 since April 1999, according to data compiled by Bloomberg.