After the initial jubilation, investors took a second look at the U.S. and China trade war ceasefire, dragging down markets and triggering a spike in CBOE Volatility Index and VIX-related exchange traded products.
On Tuesday, the iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) advanced 13.3%, ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) increased 13.4% and ProShares Ultra VIX Short-Term Futures (NYSEArca: UVXY), which provides the 1.5x or 150% daily performance of the S&P 500 VIX Short-Term Futures Index, climbed 20.4% while the CBOE Volatility Index, or so-called VIX, surged 30.4% to 21.4. Potential investors should keep in mind that VIX-related exchange traded products track VIX futures and not the spot price.
Investors initially rejoiced after President Donald Trump and Chinese President Xi Jinping agreed over the weekend to ease trade tensions, fueling a rally in global markets on Monday. However, differing public announcements following the meeting raised concerns among some investors, the Wall Street Journal reports.
“I don’t think anything changed over the weekend, and that means continued volatility in the marketplace,” Bret Chesney, a senior portfolio manager at Alpine Global Management, told the WSJ, adding that the truce hasn’t made next steps any clearer for investors.
Trump also said Tuesday morning that negotiations have started to reveal whether “a real deal with China is actually possible.” If talks falter, the president remarked he will remain a “tariff man.”
Further fueling the market volatility, U.S. government bond yields slipped even further as investors worried about U.S. growth. Yields on benchmark 10-year Treasury notes dipped to 2.89% mid-Tuesday, marking a further narrowing of the spread between U.S. 10-year and two-year Treasuries to the smallest gap in over a decade, with some concerned about a potential inverted yield curve, which has typically preceded recessions.
“While interest rate hikes have sent short-dated yields higher, tepid inflation and slowing economic growth expectations have kept longer-dated yields pinned down,” Michael O’Rourke, chief market strategist at JonesTrading, told Reuters. “It’s a signal we’re getting closer to (full) inversion but we’re still a fair distance from it. It’s something to note … something to be aware of but there’re other facts in play.”
For more information on the CBOE Volatility Index, visit our VIX category.
CORRECTION: UVXY indexing methodology.