Volatility Indexes Jump as Portugal Concern Fuels Stock Losses

Jul 10, 2014 10:37 am ET

July 10 (Bloomberg) -- A measure of European stock-market volatility rose the most in four months and the U.S. VIX jumped as concern over Portugal’s banks spurred a rout in equities.

Europe’s VStoxx Index increased 12 percent to 16.85 as of 3:27 p.m. in London, heading for the biggest advance since March. The Chicago Board Options Exchange Volatility Index climbed 7.8 percent to 12.56. The gauges track the cost of options and are considered measures of investor fear. Both are up more than 22 percent this week.

“This could just be a catalyst for a market correction,” Andrew Wilkinson, chief market analyst at Interactive Brokers LLC, said in a phone interview from Greenwich, Connecticut. “You’d have to see a sustained period of selling, back-to-back losses of 1 to 1.5 percent into next week, before people will start piling on the protection.”

Equities slumped and bonds of Europe’s most-indebted nations declined with speculation resurfacing that the euro region remains vulnerable to shocks as it emerges from the sovereign debt crisis. While Portugal’s central bank said Banco Espirito Santo SA, the nation’s second-largest lender, is protected after its parent missed debt payments, Moody’s Investors Service downgraded a company in the group, citing a lack of transparency and links to other companies.

Stocks Selloff

The Standard & Poor’s 500 Index slipped 0.7 percent to 1,958.22. The Nasdaq Composite Index and Russell 2000 Index of small-cap companies slid more than 1 percent. The Stoxx Europe 600 Index fell for a fifth day, losing 1.1 percent.

Speculation that U.S. stocks have risen too far, too fast fueled losses earlier in the week as Raymond James & Associates Inc. said equities are vulnerable and Citigroup Inc.’s chief U.S. equity strategist cited concerns for a “severe” pullback. The S&P 500 ended last week at an all-time high and the Dow Jones Industrial Average topped 17,000 for the first time.

The S&P 500 is valued at 18 times reported earnings, the highest level since 2011. Analysts have lowered their forecasts for earnings since April and now predict profit growth of 5 percent in the second quarter, according to the average estimate from a Bloomberg survey.

“We saw a little bit of a rollover in the past couple days and then you get this sort of negative news with that short-term downward momentum and you get selling,” Joe Bell, senior equity analyst at Cincinnati-based Schaeffer’s Investment Research Inc., said by phone.

--With assistance from Jacob Barach in New York.