With markets roiled, ETFs that track the CBOE Volatility Index, or VIX, surged on the heightened uncertainty and fears of the potentially wide-reaching impact from a crippling coronavirus epidemic.
Among the best performing non-leveraged ETFs of Monday, the iPath Series B S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) increased 15.7%, ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) advanced 15.5% and VelocityShares Daily Long VIX Short-Term ETN (NYSEArca: VIIX) gained 16.2% while the CBOE Volatility Index jumped 42.2% to 24.3 and touched its highest level since January 2019. Potential investors should keep in mind that VIX-related exchange traded products track VIX futures and not the spot price.
“Markets hate uncertainty and the coronavirus represents the most uncertain macro risk markets have faced in years. As the virus spreads to Europe, the threat to global growth moves beyond China and the global supply chain and now directly threatens the heart of European manufacturing in northern Italy, southern Germany and Switzerland. Investors are also acutely aware that many misjudged the economic severity of the virus early on, making them more open to entertaining worst-case scenarios now,” Alec Young, Managing Director of Global Markets Research, FTSE Russell, said in a note.
The S&P 500 plunged while the Dow Jones Industrial Average declined over 1,000 points Monday after several countries, including Iran, Italy and South Korea, revealed an uptick in coronavirus cases over the weekend.
Market observers are already lowering the outlook on fears that the spreading contagion will affect key sectors in the global economic engine. For example, Goldman Sachs already slashed its U.S. growth forecast and predicted a more severe impact from the epidemic, CNBC reported.
“The smart money is paying attention and positioning for that particular word (‘pandemic’) to drop,” Wouter Jongbloed, Head of Political Risk Analysis, Exante Data, told Reuters. “The fear right now is focused on supply chains. If the WHO does feel the pressure to use the ‘P’ word then those supply chain fears will race to the front.”
Andrew Richman, managing director of fixed income strategies at SunTrust Advisory Services, warned that if the virus is eventually labeled as a pandemic, COVID-19 add to fears among consumers and could impact spending.
Major U.S. companies like Apple have already warned of supply chain disruptions that could lead to a short-term delays. Eric Marshall, a portfolio manager at Hodges Capital, warned that any further spread of the virus will exacerbate problems and hurt consumer demand.
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