Development of the VIX Amidst Growing Uncertainty

The VIX has experienced a lot of uncertainty in 2021, and the beginning of 2022 is shaping up to be its wildest time yet.

Following the increased inflation, labour shortages, continued supply chain disruptions, the Ukraine – Russia tensions,  as well as the ongoing COVID-19 pandemic, the markets have been highly volatile as of late. If we were to add the Fed’s decision to end its taper program by March, as well as initiate several rate hikes in 2022 (in order to combat said inflation), the volatility that can be seen on the market is understandable.

As one of the best measures of showing said volatility and uncertainty, we have VIX, or Volatility Index (also known as the fear index). VIX is calculated based on the S&P 500 options and reflects market expectations on (the implied) volatility in the coming 30 days. In comparison to classic indices, VIX’s growth actually represents negative sentiment, or rather, increased risk of market volatility. VIX levels over 30 could be considered risky, and this shows that the market is expecting high volatility.

As we have had several events in the last couple of months (the Ukraine-Russia tension, Omicron appearance, the aforementioned inflation, and rate hikes), VIX has been soaring to levels not seen since the beginning of 2021 (although this is still well below its highest during March 2020). As of the time of this writing, the VIX is hovering at levels between 31 and 32 points, which is an increase of over 80% since the beginning of 2022, clearly showing an immense amount of volatility in the market.

Performance of VIX Since the Beginning of 2020 (%)

Considering its negative correlation to S&P 500, (which declined by around -8.6% since the beginning of 2022), this surge in its value does not come as a surprise. As already mentioned, the largest amount the VIX ever held (82.69) was on 16 March 2020, when the first large-scale COVID-19 restrictions were announced. Considering VIX gained almost 50% since last week, it is plausible that the current volatility trend might continue, reaching the value it had at the beginning of the last year (37.5 points) but this would also require continued volatility of the S&P 500. Looking at the remainder of the graph, we can see that it had a mostly flat run through 2020, except a few hiccups (like the largest one at the end of November, beginning of December due to Omicron and expected rate hike news).

We can also see this uncertainty spill over to Europe. In the past week, the ATX index declined by 6.51%, DAX declined by 4.11%, CAC 40 declined by 4.15%, FTSE 100 declined by 2.54%. Looking at the region, we can see that BET declined by 4.16%, SBITOP declined by 3.8%, and CROBEX and CROBEX10 declined by 3.6% and 3.4%, respectively.

Performance of Selected European Indices, WTD (%)

In terms of individual companies in the region, In Croatia, AD Plastik experienced the largest decrease of 8.2%, followed by Končar with 7.8%, Atlantska Plovidba with 4.8%, and Podravka, which declined by 4%. In Slovenia, the largest decrease was noted by Triglav, which decreased by 5%, followed by Sava Re and Petrol, which declined by 4.7% and 4.1%, respectively. On the flipside, Luka Koper was the only Slovenian blue-chip to experience an increase in this period, growing by 1.6%.

Performance of Croatian and Slovenian Blue Chips, WTD (%)

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