Market Stress Reaches 15-Month High on Oil Contagion Fear

Oil plunging below $55 a barrel, the biggest drop in Russia’s ruble in 16 years and nine straight days of selling in junk bonds have investors rushing for protection.

The price of insurance against declines across asset classes has risen to a 15-month high, according to an index of financial stress compiled by Bank of America Corp. The Market Risk Index, which tracks volatility in equities, U.S. Treasuries, currencies and commodities, climbed to the highest level since September 2013 on Monday.

Volatility across asset classes has surged as a 48 percent slide in crude prices since June and signs of a worldwide economic slowdown ripple through credit and equities. The weakness has investors such as Jim Dunigan at PNC Bank NA drawing parallels between today’s broad-based declines and those 16 years ago with the collapse of Long-Term Capital Management.

“It’s hard to know when you have a dislocation as rapid as this if somebody is caught on the wrong side,” Dunigan, chief investment officer at PNC, which oversees $130 billion, said by phone from Philadelphia. “That can cause disruptions in the marketplace. Everybody is watching for the ghost around the corner.”

Market Disruptions

Hedges against declines in the U.S. Oil Fund LP, an exchange-traded fund tracking crude, reached the highest in three years yesterday. Crude has slumped as the Organization of Petroleum Exporting Countries seeks to defend market share amid a U.S. shale boom that’s exacerbating a global glut. West Texas Intermediate rose 2 cents today settle at $55.93 after dipping as low as $53.60.

Currencies across emerging markets are plummeting, sending a gauge tracking 20 developing-nation currencies to the lowest level since at least 2008 today. The Russian ruble tumbled past 80 per dollar for the first time on record, even as its central bank decided to raise its key interest rate to 17 percent from 10.5 percent.

Venezuelan bonds sank below 40 cents on the dollar and Thai stocks fell the most in 11 months yesterday. Brazil’s corporate debt market is reeling as a graft probe of state oil producer Petroleo Brasileiro SA infects the market.

A fund tracking the riskiest debt has been in freefall as the junk-bond market comes under pressure. The iShares iBoxx $ High Yield Corporate Bond exchange-traded fund has dropped 4.7 percent in December for the worst monthly performance this year.

Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasuries based on options, has climbed 21 percent this month as 10-year government bond yields ended today at 2.06 percent, the lowest this year.

The weakness spread to U.S. equities following the Dec. 5 record for the Standard & Poor’s 500 Index, which has slumped 5 percent since. The Chicago Board Options Exchange Volatility Index, a gauge of S&P 500 options prices known as the VIX, soared 78 percent last week for its biggest gain in four years. After retreating 3.1 percent yesterday, it jumped 15 percent today.

“We know that cross-asset correlations increase in times of stress and that’s what you’re seeing now,” Jim Strugger, derivatives strategist at MKM Holdings LLC in Stamford, Connecticut, said by phone. “Elevated volatility across asset classes means that the move in U.S. equities could be even more pronounced.”

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