Stock Markets Tumble as Traders Scramble

Stock markets widen losses on Ukraine crisis, DAX rallies late on, and Wall Street turns to Options

Stock markets in Europe have closed the week on a nervous note amid the uncertainty in Ukraine. Germany’s DAX staged an afternoon recovery to close in the black, but only after sinking below the 9,000 mark earlier.

On Friday, European stock markets traded an average of 0.6 percent lower with Russia’s MICEX index with Germany’s DAX hit hardest by investor’s flight to safety ahead of the weekend referendum in Crimea.

In Moscow, the MICEX took a sharp 5-percent tumble to its lowest ebb since 2009 – only to recover the majority of the day’s losses and close 0.9-percent down.

The Russian rouble hovered near an all-time low on the back of tensions over Ukraine. On Thursday, Russia launched new military exercises in spite of US warnings that Moscow would face serious consequences if annexation was the outcome of Sunday’s referendum in Crimea.

At the Frankfurt Stock Exchange, Germany’s DAX index also closed the week on the rebound, logging a daily gain of 0.43 percent. Prior to this, however, the German exchange had dipped below the psychological 9,000-point mark. German blue chips heavily involved in trading with Russia saw some of the biggest losses. Volkswagen, BMW and Heidelberger Cement were among worst performers on Friday.

Britain’s FTSE100 was down 0.4 percent, while the CAC index in France slumped 0.8 percent as investors looked to reduce exposure to risk heading into the weekend.
Trading on Friday had the distinct whiff of a ‘risk-off’ day, IG stock market analyst Alastair McCaig told Reuters news agency.
“Every noise I’ve heard suggests that Crimea will vote to join Russia… and while the market is expecting that, it’s the consequences of it that make it more problematic,” he added.
The scuttle to safety pushed down German government bond yields, while gold, which is another safe-haven favorite, remained flat on Friday after steadily climbing for the past six weeks.


Faced with signs of financial market stress, traders are rushing back to the options market. It’s the kind of Kamikaze run that precedes a crash. But that doesn’t stop traders as Wall Street struggles to squeeze every last drop of money juice from the withering fruit that is our economy.

They’re piling into exchange-traded products tied to stock volatility, with more than 60 million shares of the iPath S&P 500 Short-Term Futures changing hands yesterday. That made the security that rises when equity swings increase the fourth-most active U.S. exchange-traded fund. They’re also adding to bets on gold: bullish contracts on an ETF tracking the metal cost the most in a year relative to bearish ones.

Record prices for U.S. stocks are pushing up demand for protection as Ukrainian tensions rise and data on everything from China’s industrial production to its retail sales show weakening growth. The Standard & Poor’s 500 Index (SPX) erased its gain for the year yesterday, falling 1.2 percent for the biggest retreat since Feb. 3, and gold reached a six-month high.
“The key risk we’re focused on is ultimately Ukraine,” Jason Benowitz, a senior portfolio manager who helps oversee about $4.7 billion at Roosevelt Investment Group Inc. in New York, said in a phone interview. “To the extent this could lead to either material economic sanctions or in fact armed conflict, either of these will certainly be headwinds.”

Bull Market

U.S. stocks are falling at the five-year anniversary of a bull market that sent the S&P 500 up 173 percent, pushing its price-earnings ratio to 17 — close to the level where equities peaked in 2008. The advance is about a week away from supplanting the stretch of equity gains that lasted from 1982 to 1987 to become the fifth longest of all time, according to Bespoke Investment Group LLC.

Secretary of State John Kerry warned yesterday there could be “very serious” steps from Europe and the U.S. if there is no sign of a resolution between Ukraine and Russia as Crimea prepares to vote this weekend on a separatist resolution. China’s industrial output, investment and retail-sales growth cooled more than estimated in January and February.
Volatility securities become more valuable when market swings increase, luring traders looking to protect gains in equities. The iPath S&P 500 VIX Short-Term Futures ETN, known by its ticker symbol VXX (VXX:US), is designed to generate the daily return of a gauge tracking futures on the Chicago Board Options Exchange Volatility Index. The VIX moves in the opposite direction of the S&P 500 about 80 percent of the time.

Higher Volatility

“Uncertainty about macro-economic data, China defaults and Russia uncertainty all seem to be coming to the front page at the same time,” Scott Maidel, a senior portfolio manager for equity derivatives at Russell Investments in Seattle, wrote in an e-mail. “Anything like this could lead to even higher volatility.”

Bullion advanced 14 percent this year, rebounding from the biggest annual drop since 1981. Gold for April delivery added 0.1 percent to settle at $1,372.40 an ounce on the Comex yesterday, the highest close since Sept. 9.
Holdings through gold exchange-traded products rose in February for the first time since 2012. Assets in the SPDR Gold Trust have climbed 1.6 percent in 2014 after a 41 percent plunge last year that erased $41.8 billion in value.

“The precious metal has become the outlet for many investors who don’t want to look at Treasuries and realize that the equity-market rally could stall,” said Kevin Mahn, the Parsippany, New Jersey-based president of Hennion & Walsh Asset Management, which oversees more than $600 million. “Concern about China slowing down is another reason to be in gold. Also, the Crimea tension pushed prices higher.”

Crimea Votes

Bullish options on the gold ETF are the most expensive since March 2013. Calls betting on a 10 percent increase in the fund cost 0.8 point less than corresponding puts, according to three-month implied volatility (GLD:US) data compiled by Bloomberg.

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The appeal of gold will decrease once the Ukraine situation stabilizes, according to Peter Jankovskis of OakBrook Investments LLC. The Russian-speaking region of Crimea will hold a referendum March 16 on whether to split from Ukraine. The European Union and the U.S. are trying to use sanctions to force Russian President Vladimir Putin to retreat.

“The flight to safety because of Ukraine helped gold, but once they find a resolution and the situation eases the premium will come off,” said Jankovskis, who helps oversee $3.4 billion as co-chief investment officer of Lisle, Illinois-based OakBrook.

Fund Flows

Not everyone is jumping back in. Assets into funds backed by precious metals have increased by 1.2 percent this year even as prices jumped. Last year, the funds saw a 36 percent withdrawal as prices slumped 28 percent, data compiled by Bloomberg show.
The Chicago Board Options Exchange Gold ETF Volatility Index, a measure of options costs on the fund, rose 3.8 percent to 17.30 yesterday. The CBOE Volatility Index of S&P 500 derivatives prices advanced 12 percent to 16.22. Europe’s VStoxx Index climbed 3.3 percent to 22.82 at 8:18 a.m. in London today.

“There has been flight to quality because of emerging-market issues and political tensions,” James Paulsen, chief investment strategist at Wells Capital Management, said by phone from Minneapolis. His firm oversees about $360 billion. “Whenever something worries you, buy gold.”

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