Many measures of market volatility are ticking a bit higher after falling to 2016 lows a month ago. The trend is not limited to the S&P 500, but is being seen across a number of different stock benchmarks and asset classes.
One index, however, is moving counter to the recent trend. To be specific, the volatility index for the Brazil stock market remains elevated relative to others. The relative performance of this index, which trades under the symbol VXEWZ, serves as an interesting case study of how events can shape investor sentiment and cause the daily swings in the VIX-type market indexes. Let’s see what’s happening.
VIX Choppy Like Benihana
An advertising exec named Fred Barnard was the first to coin the phrase “a picture is worth a thousand words” in the 1920s. And Fred was certainly right. [Editor’s note: It’s valuable to listen to a guy named Fred.]
The chart below says a lot more about the recent action in VIX than I could possibly type into 1,000 words. To summarize, VIX rallied to 2016 highs on February 11 when it took a stab at the 30 level. Yet, by April 19, the index was dipping to 2016 lows and has been moving aimlessly in a narrow range since then.
I’m not sure how Mr. Barnard felt about tables, but the one below shows the percentage changes in the CBOE Volatility Index and a handful of other indexes over the past month and also since VIX closed at 2016 highs on February 11. Notice that VIX was nearly chopped in half since the February peak, but moved up nearly 9% over the past month. Similar tales are told in benchmarks that track NASDAQ Volatility (VXN), Dow Volatility (VXD), and so on.
|Since 2/11/16||Since 4/19/16|
|S&P 500 Volatility||VIX||-48.8%||8.8%|
|NASDAQ 100 Volatility||VXN||-43.7%||5.1%|
|Russell Small Cap Volatility||RVX||-41.7%||10.2%|
|Emerging Markets Volatility||VXEEM||-38.8%||11.0%|
|Euro Currency Volatility||EVZ||-30.6%||5.6%|
Data source: CBOE
In fact, only two volatility indexes have moved lower in the past month. The Oil Volatility Index (OVX) is down 5.5% after crude oil bubbled to $46.5 from roughly $40 per barrel. Meanwhile, the biggest loser among the volatility indexes in the past month is the VIX for the Brazil equities market, as VXEWZ has dropped 8.7%.
Brazil Takes the Gold in Volatility
Although VXEWZ seems to be moving counter to the broader volatility trend over the past month, the index is not much changed year to date. It’s in the low 40s and, compared to U.S. equity benchmarks, is extremely elevated.
Figure 2 plots the difference between VXEWZ and VIX. Notice that three years ago, VXEWZ was only modestly higher than the CBOE VIX. That difference started widening in mid-2013, and there was a major spike in October 2014 amid the global market rout. The difference narrowed dramatically as global equity markets recovered in the months that followed, but the trend over the past year has been widening once again. The difference even became a bit extreme in early April when the VXEWZ hit 56 and VIX was at 16.
The 40-point difference in VIX and VXEWZ in April appears to owe to several factors. First, Brazil is an oil exporter, and falling crude prices seemed to be raising concerns about profits for the big oil companies. Additionally, an unfolding scandal that has now escalated into an impeachment trial of President Rousseff raised anxiety on the geopolitical front. Brazil is also ground zero for the Zika virus, and travel warnings have been issued ahead of the upcoming summer Olympics. All of this transpired as the country grapples with an economic downturn.
Not to draw too many comparisons between the U.S. and Brazil, because it’s not really comparing apples to apples. Since the GDP of the U.S. is nearly three times that of Brazil, it's more like comparing apples to really big apples. Still, the chief concerns in the U.S. (the Fed, slowing consumer spending, weak earnings growth, and twists and turns in the presidential race) pale in comparison to the tribulations facing Brazil’s stock market.
In short, Brazil’s stock market is priced for much higher volatility because of the myriad of different factors clouding the economic landscape. It’s keeping VXEWZ elevated to VIX, and the difference has even reached some extremes lately.
That’s what's so fascinating about financial markets and options pricing: news flow and information can change investor perceptions, which are quickly reflected in market indexes derived from the prices of put and call options. Never before have investors had access to such unique barometers or gauges to help make sense of what is happening in the financial world.
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