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Market fear in China 20 per cent lower than in developed markets

The AlphaShares Chinese Volatility Index slipped 9.07 per cent in June to finish the second quarter at 27.61, after starting the year at 24.22.

By comparison, the CBOE S&P 500 Volatility Index climbed an additional 7.70 per cent to 34.54, while implied volatility as represented by the Euro Stoxx 50 Index closed the quarter at 34.32 – levels 20 per cent higher than in China, the largest divergence in these indices since April 2005.

The CHIX/VIX spread ended the month at -20.07 per cent, with the CHIX trading lower than the VIX every day except 2 June. The last time the VIX finished higher than its CHIX counterpart for more than five days in a row was following the US East Coast blackout in the summer of 2003, which at that point was the biggest test of Wall Street’s backup systems since 9/11.

As stock prices and implied volatilities are typically negatively correlated, it held true that the VIX gained as the S&P benchmark slipped 5.39 per cent in June, and that the CHIX slipped as China H-Shares inched up slightly during the month with the Hang Seng increasing 1.84 per cent.

Complacent trading in FXI options was evident, as monthly volume in June slipped to 1.85 million contracts traded after averaging 2.89 million in the three months prior. Demand for downside protection in China equities also eased, as the put-call ratio for the contracts slipped to 1.67 from 2.30 in May.

Jonathan Masse, senior portfolio manager at AlphaShares, says: “Global volatility remained elevated due to lingering concerns about European debt woes, the stagnating US recovery, and China’s ability to navigate a soft landing. In addition, China has been combating a perceived property bubble by tightening lending and land sales. There have also been questions about China’s growth after the Conference Board sharply reversed its index of leading economic indicators.

“However, even the most conservative estimates for China’s current year GDP growth is eight per cent, which would be a ‘good problem to have’ for most countries in this environment (the IMF estimates it will be ten per cent.”

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