Wall Street’s ‘fear gauge’ logs sharpest drop in 3 years post-Brexit

Wall Street’s so-called fear gauge seemed to imply that was the case on Tuesday, slipping back to its levels seen days ahead of U.K.’s stunning vote last week to exit the European Union roiled global markets.

Indeed, the CBOE Market Volatility Index VIX, -21.38% on Tuesday ended down 20% to 19.09, marking its lowest reading since June 21—two days before the U.K. vote to exit the EU, known as Brexit..It’s the sharpest decline for the indicator since Oct. 16. 2013, according to FactSet data.

Read: 5 ways to stop Brexit from happening

The drop in the VIX—used in financial markets as a measure of fear or volatility—marks a two-day decline for the indicator, which dropped 7% on Monday even as the Dow Jones Industrial Average DJIA, +1.57% S&P 500 index SPX, +1.78% and Nasdaq Composite Index COMP, +2.12% continued to tumble, contributing to theworst two-day stock rout ever. Global stock markets shed more than $3 trillion in value. Some market participants took that as a signal the worst of the ugly Brexit carnage was over.

On Tuesday, the climb in the VIX came as assets perceived as risky, like stocks andcrude-oil futures CLQ6, +0.73% drew bidders and the Dow, S&P 500 and Nasdaq Composite posted their best one-day jump in four months.

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Although the VIX is low on a comparative basis, investors and technical analysts tend to pay closer attention to the indicator when it climbs above 20. Friday’s swoon resulted in the VIX logging its sharpest jump in nearly five years as fear gripped Wall Street traders who were uncertain about the implications of a Brexit. Among VIX-related funds, the exchange-traded VelocityShares Daily 2X VIX Short Term ETNTVIX, -21.26% was down about 23% and the Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures ETN VXX, -10.16% closed more than 10% lower.

To be sure, uncertainty reigns and the current bout of optimism could prover ephemeral. Former Federal Chairwoman Alan Greenspan last Friday referred to unfolding geopolitical events as just “the tip of the iceberg” and said the “global economy is in real serious trouble.”

Much of that concern centers on Brexit.

Although the mechanism is in place for the U.K. to end its decadeslong EU membership, a lack of detail, given the unprecedented decision to leave the trade bloc and a deterioration in Britain’s leadership, have stoked deep concerns about how a Brexit will play out and how it will affect an already sluggish eurozone economy.

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