VIX Soars on European Fears

On Friday, global financial markets witnessed one of the most turbulent days in the recent past after Britons voted to leave the European Union. UK became the first country to leave the European Union in 59-year history of the region, sending investors across the world into a panic mode. Global financial markets remained jittery on Friday, with equity markets selling-off sharply and the British Pound, at one point, dropping to its lowest level in over three decades.

Volatility index soars 50% after Brexit vote

A dramatic outcome from a historic EU referendum in the UK triggered a massive volatility and sent shock waves across global financial markets. The CBOE’s volatility index (VIX), Wall-Street’s preferred gauge of market uncertainty that measures the level of fear in financial markets, surged as much as 52% on Friday. There was a sense of shock among global investment fraternity as the final outcome defied all expectations as the recent opinion polls had suggested that voters would reject a Brexit. It is important to note the vote in itself is not enough for Brexit to occur as the government could still ignore the result and refrain from putting the Brexit vote in front of the British parliament, which, however, seems unlikely.

The VIX on Friday matched its biggest one-day percentage gains on Aug. 8, 2011, after Standard & Poor’s Ratings Services downgraded the U.S.’s sovereign rating from triple-A to AA+ and on Aug. 24, 2015, when it surged following the devaluation of the Renminbi by the Chinese central bank that led to a brutal sell-off in the Chinese stock market. During the last week of August 2015, the index posted its largest weekly rise and skyrocketed 118% before receding back in Sept.

Despite of the highly depressed investor sentiment, the VIX is nowhere near levels seen in Oct. 2008, when the index soared to 89.50 in wake of the financial crisis of 2008.

Volatility to remain elevated
The economic implication of Brexit will be difficult to gauge as the whole process of separating from the union is expected to take at-least two years. Moreover, the referendum now increases the possibilities for other member countries to follow suit to leave the EU. Adding to this, possibility of Scotland leaving UK, with the idea of joining the EU, further adds to the uncertainty.

Being the fifth-largest economy in the world, a period of prolonged political, economic and financial uncertainty in the UK accompanied with the high level of uncertainty over the fate of the European Union might continue to fuel and keep volatility elevated in global financial markets, making it extremely difficult for investors to anticipate next move in the markets.