Breakingviews - Volatility shock knocks Credit Suisse's new image

Ivan Schwartz
February 8, 2018

It is highly important to make sure all the research is done on a stock, especially if the investor is heavily weighted on the name. Generally, the RSI is considered to be oversold when it falls below 30 and overbought when it heads above 70.

Meanwhile, investors have been reluctant to bet on volatility amid the market's extended period of calm.

Two banks, Credit Suisse Group AG (CSGN.S) and Nomura Co Ltd (9716.T), said on Tuesday they would terminate two exchange traded notes (ETN) that bet on low volatility in stock prices, including Credit Suisse's VelocityShares Daily Inverse VIX Short-Term ETN (XIV.P) which will stop trading by February 20.

As European markets sank on Tuesday, the region's equivalent to the VIX - the VSTOXX - followed suit with its biggest one-day surge since the September 11 attacks in 2001.

The Cboe Volatility index (VIX) measures market volatility and is often referred to as the "fear index".

Many of these products were sold on a leveraged basis, meaning investors buying notes tied to measures of volatility could take large bets for little upfront cash.

If investors do decide to challenge Credit Suisse over their product, it would not be the first time.

The S&P 500 had not fallen by more than 5 percent for more than 400 days, the longest run since the 1950s, according to Mark Haefele, chief investment officer at UBS Wealth Management. The RSI may be useful for spotting abnormal price activity and volatility. The stock has moved north 39.76% over the past week of trading.

Maryland-based ProShares said in a brief statementTuesday that SVXY's after-hours action on Monday, which saw the product tumble, was consistent with its objective and reflected the changes in the level of its underlying index.

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Unlike exchange traded funds that track an index by buying stocks in the same proportion as their targeted benchmarks, ETNs linked to volatility trade in VIX futures.

When it comes to securing profits in the stock market, investors may be trying to find a flawless system to help attain that goal.

The repercussions have been severe for some funds.

Swiss bank Credit Suisse said Tuesday it is winding down its so-called VelocityShares Daily Inverse VIX Short-Term exchange-traded note after it lost 91 percent of its value Monday.

But professional traders said a logical interpretation of language in their prospectuses suggests the notes could be liquidated under circumstances that resemble today's.

The VelocityShares ETN was down 94 percent Tuesday afternoon. A level of 50 would indicate neutral market momentum. Peers marketed by other banks also fell sharply.

XIV wasn't the only exchange-traded product hammered by Monday's VIX spike.

The impact of the market sell-off on other asset classes has been fairly muted though various gauges have risen reflecting broader uncertainty around markets in the short term. The general interpretation of the ATR is the higher the ATR value, the higher the volatility.

The VIX Index, a measure of US equity volatility, more than doubled on Monday, triggering a slump in the value of exchange-traded products that only make money when equity moves are muted.

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