VIX Volatility Index

Source: US Federal Reserve, St Louis 

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US shares have been in turmoil since February 2nd. The announcement that US wages growth had accelerated to its fastest pace since 2009 was the catalyst for this sharp share selloff. However this US inflation surprise was actually magnified into a shock due to complacency about volatility.

Indeed there was a notable absence of fear in financial markets. Even the ‘fear gauge’ known as  the VIX was trading at a tranquil 12% on January 31st. The VIX is an option pricing measure of US share market volatility over a one month time horizon. Any concerns about US inflation risks or North Korea or even Middle east tension were just concerns rather than potential catastrophes.

History reminds us that when fear returns, the VIX volcano erupts. Over the past two decades, there have been numerous episodes of intense share market volatility. The current turmoil has seen the VIX climb to 37.3 on February 5th, its highest close since August 2015 when China devalued its currency. US share investors are hoping this is just a temporary setback, as was the case in  2015.

Yet the high VIX reading presently suggests that  the age of tranquillity has passed. US share volatility is now “back to the future”.

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Source: NAB Asset Management 12 February 2018

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