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Business News/ Market / Mark-to-market/  The Chicago VIX-Sensex tango
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The Chicago VIX-Sensex tango

The Sensex and the CBOE Volatility index have a strong negative correlation

The trend is more worrying this time around as investors are not sure if the recovery will be sustained in the US after manufacturing activity in January dropped to its lowest level in eight months. Photo: Chicago Board Options ExchangePremium
The trend is more worrying this time around as investors are not sure if the recovery will be sustained in the US after manufacturing activity in January dropped to its lowest level in eight months. Photo: Chicago Board Options Exchange

The S&P BSE Sensex and CBOE (Chicago Board Options Exchange) Volatility index, or VIX, have a strong negative correlation (see accompanying chart). In the past, whenever there has been a sharp rise in the VIX, the Sensex has declined. VIX represents the US markets’ expectation of near-term volatility and is calculated using prices investors are willing to pay for S&P 500 index options. A high level for the VIX indicates that investors are expecting a big move in the markets in the near-term.

Since the last week of January, the Sensex has fallen 6%, while the VIX rose 36%. A similar trend was seen after US Federal Reserve first spoke about tapering its bond-buying programme last May. At that time, the Indian markets plunged 7% and the VIX jumped 41% in three weeks. This time around, it’s more worrying that investors are not sure if the recovery will be sustained in the US after manufacturing activity in January dropped to its lowest level in eight months. The data comes on the heels of weak manufacturing growth in China.

Last week, outflows from emerging market equities and bonds rose to $3.9 billion, according to EPFR Global data. Credit Agricole in a note dated 4 February said investors should steer clear of risk assets over the short term as the turmoil may not be over anytime soon. Although the twin deficits in India have improved, its economy continues to be weak. Foreign investors in India have sold a net $1.6 billion worth of shares and bonds in the seven sessions of trade till Monday.

“The US manufacturing slowdown could be a one-off because of severe winter in January but China’s financial system is facing stress and it is unclear whether the government will step in to stabilize the system," Saurabh Mukherjea, CEO of institutional equities from Ambit Capital Pvt. Ltd said. Emerging markets, including India, may remain under pressure unless the new US Federal Reserve chairman Janet Yellen decides to lower the pace of tapering given the fragile recovery.

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Published: 04 Feb 2014, 06:07 PM IST
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