What is the Fear Index?

While the world has always been an uncertain place, a globalised financial system has made overseas shocks increasingly important for Australians.

Recently, we've seen the Australian market shaken by events such as the European debt crisis, Japanese tsunami and a slowdown in America. While these events may not be occurring on our shores, international investors don’t like negative sentiment (fear) and when bad things happen they tend to shift their money out of stocks, commodities and risk currencies (in the past the Australian dollar) and back into the US dollar.

Then, when the fears subside, the pattern reverses, and this large and powerful group of international investors sends their money back into commodities and the share market.

The Fear Index

There is an index used to measure this investor fear called the Fear Index. Based in America, the VIX as it is known shows the market’s expectations of volatility for the S&P 500 (top 500 public American companies) during the next 30 calendar days. The higher the number of the index, the more everybody is freaking out about the future.

Alarmingly, the Fear Index jumped 25 per cent yesterday before finishing at 18.62. That’s the biggest one-day jump the index has seen since November of last year.

Australia’s has its own version of the Fear Index, with the ASX code XVI,  and that too was up to 18.26, rising from 16.33 just a week ago. Clearly something is spooking investors.

What to know more about the fear index?

Europe again!

A depending recession and population unrest has again sparked speculation that Spain, the fourth largest economy to use the euro currency, will be next in line for a government bailout.

To make matters worse, the credit ratings agency Moody’s has warned the outlook for Germany’s AAA credit rating is negative, the first step towards a possible downgrade.