At a time when US stocks are kneeling, the tension in the Middle East is intensifying and interest rate cuts are expected to reach a freezing point. The “panic index” VIX index rose to 19.6 this week, the highest level since October 20 last year.
On Wednesday, US stocks experienced their first four-game drop since this year. The S&P 500 index closed down 0.6%, while the NASDAQ was dragged down by chip stocks and closed down 1.2%.
At a time when US stocks are kneeling, the tension in the Middle East intensifies and interest rate cuts are expected to reach a freezing point. US investors are paying the highest insurance premiums since October last year to protect their portfolios from market fluctuations.
Wall Street's so-called “fear index,” the VIX index, rose to 19.6 this week, the highest level since October 20 last year. The indicator measures the price of options that allow investors to benefit from fluctuations in the S&P 500 index.
By the close of the US stock market on Wednesday, the index had fallen slightly to around 18.2, but it was still well above 12.6 in late March.
Market turbulence also affected US debt. The ICE BofA Move index, which measures the volatility of US bonds, reached 121, the highest level since the beginning of January, and far higher than 86 in March.
Alex Kosoglyadov, managing director of Nomura Securities's global equity derivatives division, said that the surge in demand for put options (which can hedge against the risk of falling stocks) was in stark contrast to earlier this year.
He said that previously investors were more concerned about missing out on opportunities to rise in the stock market than to protect their portfolios from sell-offs.
“Investors previously bought upward exposure as a hedge,” Kosoglyadov said. “The risk is that the market will continue to rise and their performance will fall short of the market.”
Market sentiment has reversed since Iran hinted last week that it would retaliate against Israel's attack on its consulate in Damascus.
According to Mandy Xu, head of global market derivatives market intelligence at the Chicago Board Options Exchange, Vix options trading volume hit a 6-year high last Friday.
Since then, the situation in the Middle East has further escalated. Iran launched more than 300 armed drones and missiles at Israel last Saturday, and Israel is currently considering how to retaliate.
Solita Marcelli, chief investment officer for the Americas at UBS Wealth Management, said investors are buying “downside protection” due to the tense geopolitical situation.
Investors are also re-evaluating strategies after the strong US economy triggered a shift in interest rate expectations.
Federal Reserve Chairman Powell said on Tuesday that the inflation rate may take “longer than expected” to fall to the central bank's target level, thus paving the way for interest rate cuts.
The bitmap shows that the Federal Reserve is expected to cut interest rates by 25 basis points three times this year, but investors now expect to cut interest rates only once or twice. In January of this year, they expected to cut interest rates 6 times.
Editor/Somer