VIX, or volatility index, measures the volatility of the S&P500 index’s options and is commonly referred to as the fear index. In this brief overview, we’ll look at what insight it can give us.
In the current times, almost every day news regarding the uncertain (and often negative) future of the economies across the world can be read. One day it’s the inflation rate, the other it’s the war in Ukraine and its implications, and so on and so forth. However, news like these aren’t “new”. For a really long time now, and especially after COVID-19 began, negative news has been at the forefront. One could argue, how couldn’t they? After all, before the pandemic started, the world as a whole recorded one of the best decades for growth in a long time. As such, it’s easy to see things as more negative after the pandemic started, as in relative terms, the world “seemed” like a better place to live before the pandemic.
Now, so much news of this kind has been around, from the aforementioned high interest rates, and wars, to specific countries (in both Europe and the Americas) having the worst performance in a while (some of them even dubbed “the Sick Man of …”). After a while, it would seem that this negativity has almost of a “numbing” effect, and news that would cause a market deterioration, like interest rate hikes, and large natural disasters associated with climate change, don’t seem to have that major of an effect. After all, after hearing a similar thing over and over again, even if each of these things by themselves could have negative consequences, people get tired of hearing them.
This could be an approximation of what is happening right now on the market, and why the market sentiment despite all the negative news does not seem to be as affected. Furthermore, despite all of this, there seems to be hope that the situation might improve soon. This brings us to the volatility index, or VIX, also known as the fear index. It is called that as it measures the volatility of the options on the S&P500 index, meaning that in a sense, it measures the sentiment on the market and the expectations for the future. As such, by extension, it could be used as a proxy for future market movements. After all, in majority of the cases, if people believe that something will increase or decrease, the market tends to go in that direction, especially in the medium to long term.
Volatility index (VIX) performance (2013 – 2023 YTD)
Source: Bloomberg, InterCapital Research
Currently, the volatility index sits around 18.6 points, with the higher the number implying higher volatility. For example, at the height of the Global Financial Crisis of 2008, the volatility index breached 79 points, while at the beginning of the pandemic, it reached 66 points. If we look at the graph, indeed we can see there is a lot of volatility, however over the last 10 years, the index averaged at app. 18.1 points. Before the pandemic, it averaged an even lower 14.9 points. What can this tell us? The current market sentiment, despite all of the things that are going on, is generally positive. That the expectations for the future, are also quite positive. Quite a turnaround from all the doom and gloom we have witnessed in the last couple of years. Especially if we consider that the interest rates in the US, but also Europe and across the world are at really high levels, especially compared to what they were before. If we add the geopolitical situation into the mix, one would expect a lot more volatility and a lot more fear to be demonstrated on the market. And even though there are periods when that is the case, such as when news that oil production has been cut, or the war in Ukraine has escalated to a new level not before thought to be possible, like an elastic band, the sentiment returns to pretty much the baseline.
Meanwhile, as expected, the negative correlation between the VIX and S&P500 is quite high, at -0.7, meaning that a decrease in the VIX, leads to an increase in the S&P500 index. Has this been the case? Over a longer time period, and in this sense years, it wouldn’t make sense to compare one to the other even with this negative correlation, as there are many many things that can influence the sentiment on the market and thus skew data. In the shorter time frame, in which the sentiment could be more easily gauged, it could be argued that the comparison can be made. For example, on a YTD basis, VIX declined by app. 19%, while in the same period, the S&P500 increased by 11.5%. This makes sense. Better sentiment on the market -> more people willing to invest -> growth in the index.
So maybe the summary that could be taken away from this is, that no matter how negative the news might seem, it feels a lot more “real” in the moment. Furthermore, over the longer time period, despite all the negativity, there is still positivity left as well, even in an abstract form such as the index that tracks options.
At the end of August 2023, the total amount of loans that were issued by the Croatian financial institutions recorded an increase of 0.6% MoM and 6.2% YoY. Meanwhile, the average housing loan interest rate amounted to 3.46%, representing an increase of 0.2 p.p. MoM, and 0.9 p.p. YoY. Consumer loans also recorded an increase in their interest rates, with it amounting to 5.87% on average, an increase of 0.2 p.p. MoM, and 0.7 p.p. YoY.
Recently, the Croatian National Bank, HNB, published its latest report on the performance and changes recorded by the Croatian banking sector, including the data for loans. From the report, we can see that in August 2023, the total loan amount issued by all Croatian banks amounted to EUR 42.3bn, representing an increase of 0.6% (or EUR 262m) MoM, and 6.2% (or EUR 2.5bn) YoY.
The two main categories driving this, household and corporate loans, are still recording positive growth rates, at least on a yearly basis. In total, household loans amounted to EUR 21.1bn, an increase of 0.9% (or EUR 191.3m) MoM, and 6.8% (or EUR 1.34bn) YoY. Corporate loans, on the other hand, decreased by 0.5% (or EUR 69.9m) MoM but increased by 9.7% (or EUR 1.27bn) YoY.
Corporate and household loans growth rate (January 2015 – August 2023, %)
Source: HNB, InterCapital Research
Next up, we took a look at the growth drivers within these categories, starting with corporate loans. On an MoM basis, working capital loans decreased by 0.7%, or 33.5m, investment loans increased by 0.2%, or EUR 13.4m, while the other loan categories recorded the largest increase, of 1.4%, or EUR 59m. Meanwhile, on a YoY basis, working capital loans increased by 2.1%, or EUR 91.2m, investment loans increased by 6.6%, or EUR 354.9m, while other loan categories grew by 26.6%, or EUR 892.9m. Here we can see that despite the challenging environment currently faced by the companies, the demand for loans is still quite high.
Moving on to household loans, the largest category is of course housing loans, which account for 50.2% of the total. In August 2023, housing loans amounted to EUR 10.6bn, increasing by 1.2% (or EUR 122.7m) MoM, and 9.9% (or EUR 956.7m) YoY. Solid growth was also recorded in consumer loans, which by the end of August amounted to EUR 7.7bn, increasing by 0.7% (or EUR 53.7m) MoM, and 6.4% (or EUR 461.2m) YoY.
Composition of Croatian loans to households (October 2011 – August 2023, EURm)
Source: HNB, InterCapital Research
Of course, loan amounts by themselves wouldn’t tell the entire story, and interest rates also have to be looked at. In August 2023, the average housing loan interest rate amounted to 3.46%, an increase of 0.2 p.p. MoM, and 0.9 p.p. YoY. Consumer loans also recorded an increase, with the average interest rate amounting to 5.87%, a growth of 0.2 p.p. MoM, and 0.7 p.p. YoY. Finally, corporate loans recorded an interest rate of 4.98%, an increase of 0.2 p.p. MoM, and 3.1 p.p. YoY. From this, we can see that it is significantly more expensive right now for corporate clients to take loans, which could explain a slight slowdown in the amount of corporate loans. On the other hand, despite the increasing housing loan interest rates, as well as the ever-growing housing prices, housing loan growth is still continuing. Given the demand and supply discrepancy in the housing market, this trend will likely continue moving forward.
Average new housing and corporate loan interest rates (December 2011 – August 2023, %)
Source: HNB, InterCapital Research