Historical VIX spikes
Since 1990, we identify seven independent instances where the two-day change in the VIX index has increased by more than 50%. Such occurrences capture unexpected sell-offs in risky assets and a sharp transition from what has previously been a fairly benign global market backdrop.
Chart 1: 7 instances where the VIX index has spiked by more than 50% since 1990
Most spikes accompanied by lower stocks, higher bond prices
The majority of episodes - including the current market sell-off - have seen the typical 'risk-off' pattern in global markets. Only during the August 1990 episode - around the time of the Gulf War - did we see the stock market sell-off coincide with a bond market sell-off (and a sharp rise in 10-year US Treasury yields). The other six episodes have seen the typical 'risk-off' pattern of lower stocks and lower bond yields - indicating a rotation out of risky assets into safe-haven bonds by global investors. This also tentatively shows that the current market sell-off is not one driven by rising US bond yields (and a bond market sell-off) – rather, the causation stems from equity markets.
Chart 2: Majority of episodes saw the typical 'risk-off' pattern in global markets
The contagion effect
The contagion effects to other asset markets from the current stock market sell-off has been relatively muted compared to historical episodes. In particular, we note that moves in currency markets - notably USD/JPY - have not been as disorderly as had been the case in prior instances when the VIX has unexpectedly spiked; past episodes on average have seen USD/JPY move lower by around 1.2 standard deviations more than the current move (ie, USD/JPY should be trading closer to 107 based on the extent of the current VIX spike). Our initial takeaway from this is that the current equity market sell-off may be a result of prior over-exuberance for risky assets– which were not necessarily reflected in other asset markets. Therefore in an environment where we continue to see a non-fundamental stock market correction, the spillover effects to other asset markets (namely bonds and currencies) may continue to be limited in size and extent.
Chart 3: Contagion effects to other asset markets from the current stock market rout has been muted compared to history
FX implications
USD/JPY remains the preferred cross to monitor for any nascent signs of disorderly FX markets - although the current stability around the 109 level, despite the ongoing equity market rout, supports the argument that this may not be the typical 'risk-off' currency market backdrop (especially relative to historical VIX spikes). As we noted earlier, there may be only a few relative value opportunities in the currency space to position for any stabilisation in the current stock market sell-off.