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VIX Soars Most in Four Years to 48 on U.S. Rating; VStoxx Jumps

VIX Tops 46, Global Volatility Soars
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S.. Photographer: Scott Eells/Bloomberg

The VIX soared the most in more than four years and Europe’s volatility index increased for a record ninth-straight time 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 50 percent to 48 at 4:15 p.m. in New York, its highest level since March 2009. Europe’s VStoxx Index climbed 15 percent to 45.30 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 25 percent to the highest level since May 2009. 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.”

The Standard & Poor’s 500 Index plunged the most since December 2008 and stocks tumbled from Hong Kong to Mumbai and Frankfurt, sending benchmark Asian and European indexes down as much as 20 percent from their peaks, after the U.S. downgrade. That reduction, 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 fell 6.7 percent to 1,119.46 and the Stoxx Europe 600 Index tumbled 4.1 percent to 228.98, its lowest level since August 2009. The MSCI Asia Pacific Index, which entered a so-called correction last week after falling more than 10 percent from a May peak, lost 2.5 percent to 122.90.

“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 Soars

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.

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 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 3.7 percent for a record 11th straight day of loss. It closed at 2,286.91, its lowest level since July 2009.

VIX Futures

VIX futures rose across all maturities expiring through March. September futures rose 15 percent to 30.20. December’s rose 7.4 percent to 26.05, the lowest level of all futures on the volatility indeed. The most-active VIX options were August 40 calls.

U.S. stocks slumped for the past two weeks as reports on manufacturing and consumer spending showed the world’s largest economy is slowing.

More than 39 million options on stocks, indexes and exchange-traded funds changed hands on U.S. exchanges on Aug. 5, according to 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.

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