Explosion in VIX points to larger sell-off

Markets cracking amid repeated short squeezes

Chart of the Day

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By now you’ve surely seen the charts of GameStop, AMC, Bed Bath & Beyond and more rocketing to the stratosphere as organized groups of retail traders look to push up the share prices of stocks with large open short exposure, thereby forcing those that are short - mostly hedge funds - to cover at very large losses. This is now having broader market implications, with fears about hedge funds going under causing a sell-off across equity markets yesterday and the VIX index of implied equity market volatility exploding. The issue here is that there are positive feedback loops in these events, in that higher volatility causes traders to trim their positions, which causes prices to fall, which causes margin calls and more forced selling. The last time VIX spiked like this in October, the S&P 500 dropped by 5% in a few days - it was down about half of that yesterday.

Macro

There was some good economic news though, with durable goods orders rising further - normally a good sign for investment.

By contrast, consumer confidence is falling again in Germany - not that it’s hurt retail sales at all.

In Brazil, foreign direct investment ended the year very weakly.

Markets

The market sell-off took no prisoners from a sector perspective.

The VIX index of implied equity market volatility exploded, which would typically be associated with a larger sell-off than what we’ve seen so far.

Safe-haven assets have benefited, with government bond yields falling.

Likewise, the USD rose against almost every currency yesterday.

Copper is one to watch for fears that this could dampen economic growth expectations - it dropped by 1.6% yesterday.

One good piece of market-related news was that crude stocks dropped by almost 10 mn, versus the consensus forecast for little changed. That helped prevent oil prices from falling.

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