Exchange traded products that track the CBOE Volatility Index, or VIX, surged Monday as volatility experienced its sharpest daily jump in over a year in response to President Donald Trump’s threats to raise tariffs on Chinese imports ahead of a trade meeting in Washington this week.
On Monday, the iPath Series B S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) jumped 8.9%, ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) increased 8.8% and VelocityShares Daily Long VIX Short-Term ETN (NYSEArca: VIIX) advanced 8.8%. Potential investors should keep in mind that VIX-related exchange traded products track VIX futures and not the spot price.
Meanwhile, the VIX climbed 24.9% to 16.1, its highest level since mid-March, and it was up over 40% at its intra-day peak to 18.8, its highest intra-day level since January 2018.
U.S. equities plunged and volatility spiked Monday after Trump threatened to increase tariffs on Chinese imports at the end of the week. Trump said there is a possibility of imposing a 25% tariff on another $325 billion in imports from China not currently covered.
“When the president puts his foot down, it makes the market go down,” Chris Rupkey, chief financial economist at MUFG Union Bank, told Bloomberg. “Tariff man is back just in time to make the stock market dive, dive, dive.”
U.S.-China meeting in Washington
However, some remained cautious and believed that the threats ahead of the U.S.-China meeting in Washington was a ploy to get a better deal.
Higher tariffs “would seriously hurt both the global and U.S. economic growth outlook – particularly when both U.S. and foreign manufacturing data is already the weakest part of the economy,” Jim Paulsen, chief investment strategist at Leuthold Group, told Bloomberg. “However, I believe this most likely will be a negotiation threat and an agreement between U.S. and China is indeed nearing. This, in my view, while it will create a potentially volatile week for stocks, I think any significant weakness will prove to be a buying opportunity.”
If you believe this is just a trade tactic being employed through “the art of the deal,” one may consider inverse VIX ETPs, such as the ProShares Short VIX Short-Term Futures ETF (NYSEArca: SVXY), which follows the inverse or -100% daily performance of VIX futures, to play a potential turnaround once a deal is in place
For more information on the CBOE Volatility Index, visit our VIX category.