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VIX Plummets And Share Markets Soar

August 11, 2014 - Written by John Cameron

Today’s session has seen the closely-monitored VIX ‘Fear Index’ drop by close to 9%, suggesting that calm is breaking out amongst market participants in spite of the ongoing presence of significant geo-political risk events in various corners of the globe.

The spread betting firms had the VIX trading at above the 16.00 threshold during the early part of today, but within the first two hours of the New York equities session, the gauge of defensive ‘put’ options placed by US traders had slid to as low as 14.58. The move coincided with a marked improvement in the level of the S&P 500 index which continued to move Northwards away from the 1900 level which it briefly broke down through last week.

The improvement in risk appetite amongst investors follows American air strikes against Islamic State (IS) targets in Iraq. The move, which has been accompanied by attendant air drops of humanitarian aid, has been taken by investors as a sign that the current US administration has no appetite for another land war in the troubled Middle Eastern state. Today’s uptick in appetite for risk appears to have come in response to this.

Elsewhere, Moscow’s MICEX share index has climbed by 1.8% so far today following the announcement by leading stock index compiler MSCI that it will be retaining the former Soviet state’s two premier retail banks in its headline MSCI Russia Index. Yevgeny Loktyukhov of Promsvyazbank predicted earlier today that, ‘given the decision by MSCI not to exclude the shares of Sberbank and VTB from its indexes, as well as the lack of negative news from Ukraine, we expect the Russian stock market to recover at the start of this week.’ Ongoing tensions in the Eastern part of Ukraine had contributed to the firmly ‘risk off’ trading environment of the past two weeks.

Comments from Federal Reserve Vice Chairman Stanley Fischer earlier today added to the positive mood. His observation that inertia in the supply of labour in the United States is a possible drag on future levels of economic activity in the world’s number one economy added to the ‘risk-on’ trading environment. Fischer’s assertion that, ‘there are good reasons to believe that some of the surprising weakness in labor-force participation reflects still poor cyclical conditions,’ would appear to signal that the next increase in interest rates from the US Federal Reserve could be a long way off. The prospect of continued ‘easy money’ has fuelled today’s improvement in risk appetite, but investors beware : this could prove to be a short-term phenomenon.
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