Volatility Gauges Surge as Global Markets Reel

Volatility gauges around the world surged Thursday after Morgan Stanley (NYSE:MS) cut its global growth forecast for the year from 4.2% to 3.9%, citing insufficient policy response by European regulators to the region’s debt crises and the prospect of fiscal tightening among its reasons for lowering its expectations.

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The Chicago Board Options Exchange Volatility Index, known as the VIX (NYSE:VXX), jumped 28% today to 40.56 at 11:53 a.m. in New York. The VStoxx Index, which measures European volatility in terms of the cost association with protecting against declines in the Euro Stoxx 50 Index, climbed 35% to 47.17. Volatility gauges in Hong Kong, Japan, India, and South Korea also rose Thursday.

Volatility surged on concern that European banks, hard-hit by the sovereign debt crises of countries like Greece, Italy (NYSE:EWI), and Spain (NYSE:EWP), lack sufficient capital. U.S. regulators are investigating American branches of Europe’s largest banks to gauge their vulnerability to increasing financial pressures and to determine whether the banks have reliable access to funds necessary to their day-to-day operations.

Inflation is also on the rise in the U.S., according to recent Labor Department reports, and people are growing increasingly concerned that their hopes for another stimulus from the Federal Reserve may go unfulfilled. And according to a Federal Reserve report, manufacturing in the Philadelphia region contracted in August, compounding upon the many economic fears that have resulted in a highly volatile day of trading. The Dow had forfeit nearly 450 points as of 2 p.m. this afternoon, while the banking sector on the Stoxx Europe 600 Index fell 6.7%, leading the Index to close the day down 4.8%.

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The VIX (NYSE:VXX) climbed 50% to 48 on August 8, its biggest one-day jump since February 2007. On August 10, the VStoxx climbed to its highest level since May 2010. The VIX has averaged a score of 20.37 over the past 21 years, about half of its current level, while the VStoxx average has been 25.98 since April 1999, more than 20 points below its current level.