The most closely watched investor anxiety gauge on Wall Street recorded its largest intraday surge in history on Monday morning, as U.S. stocks tumbled amid growing fears that the United States may be entering a recession.
The CBOE Volatility Index (VIX) reached a peak of 65.73, about 42 points higher than last Friday’s close, as Wall Street began the week following a global market sell-off, which at one point saw Japanese stocks surpass the losses of “Black Monday” in 1987.
The VIX rose 34 points to its highest level since March 2020. During the day, however, traders softened their spirits.
This volatility spike comes after an unusually long period of calm in the market, during which the S&P 500 went 356 sessions without a 2% or greater drop, the longest streak since 2007.
It has been an unusually long period where stocks kept rising, and it was assumed that all one needed to do was wait, and eventually, they would go up. At some point, this disconnects from reality.
The recent collapse in global equity markets is more a reflection of a liquidation of “carry trade” operations, which investors use for leverage, than a sudden shift in the economic outlook for the United States.
Instead, the likely explanation lies in a fresh and significant unwinding of “carry trade” positions, where investors borrow money from economies with low-interest rates, such as Japan or Switzerland, to finance investments in higher-yielding assets elsewhere.
The Japanese yen has surged more than 11% against the dollar since hitting its 38-year low just a month ago.