One chart shows why the stock market panic is unlikely to spread to other assets

pulse

February 6, 2018 3:03 PM

ING strategist Viraj Patel argues that the lack of a major reaction in the FX markets is a good omen that the current global stock rout is merely a correction.

As the global market dive continues, some in the market believe the rout could spread and become part of a wider drop in global asset prices.
ING strategist Viraj Patel argues that the lack of a major reaction in the FX markets is a good omen that the current global stock rout won't spread.

LONDON — As the global market dive continues at pace, some in the market believe the rout could spread and become part of a wider drop in global asset prices.

So far falls have broadly been contained to stocks, but that could change, with market linked products like ETFs one of the areas causing most concern.

Analysts at ING however, urged caution, pointing to a chart showing that in historical terms, "the contagion effects to other asset markets from the current stock market rout" have been "relatively muted."

That's particularly true when it comes to currencies, according to Forex strategist Viraj Patel.

"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)," Patel wrote a little earlier.

As the chart shows, stocks, oil, and short term US bond yields have reacted more aggressively than historical spikes in volatility, but longer term yields, as well as forex, have underreacted. That, Patel believes, is a good sign about the overall health of the market, and suggests this is more a correction than a full scale market crash.

pulse