VIX ETFs soar as Covid fears trigger market volatility

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The Cboe volatility index and VIX-linked exchange-traded funds surged on Monday as stock markets faltered and investors lowered risk in the face of increasing infections with the Covid-19 Delta variant.

Monday, iPath Series B S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) increased by 14.3% and the ETF ProShares VIX Short-Term Futures (NYSEArca: VIXY) rose 14.5%, both exceeding their short-term resistance at the 50-day simple moving average. Meanwhile, the CBOE Volatility Index climbed 22.0% to 22.5, breaking its long-term resistance at the 200-day simple moving average.

The so-called fear gauge jumped as the S&P 500 fell 1.6% on Monday.

“You have two overlapping concerns… concerns about market techniques and concerns about growth,” Mohamed El-Erian, chief economic adviser to Allianz and former co-CEO of Pimco, told CNBC. “That’s what all asset classes tell you.

Fueling market fears, cases of Covid have increased in the United States this month, with the more contagious Delta variant adding to higher infection rates. The United States is averaging nearly 30,000 new cases per day in the last seven days ended Friday, up from a seven-day average of about 11,000 cases per day a month ago, according to CDC data. Cases were also increasing worldwide due to the Delta variant.

“The market appears poised to take a more defensive character as we experience a significant deceleration in earnings and economic growth,” Mike Wilson, chief US equity strategist at Morgan Stanley, said in a note. “The breadth of the market has been deteriorating for months and is just another confirmation of the mid-cycle transition, in our opinion. It usually ends with a correction of the index level of the material (10-20%).

Despite Monday’s pullback, equity markets remain close to their all-time highs as hopes of a better-than-expected earnings season have helped fuel recent market gains.

“Today’s market downturn was hit with unusual jolts after months of calm markets,” Lindsey Bell, chief investment strategist at Ally, told CNBC. “But there has been a steady rotation in home stocks over the past few weeks, with worries of economic growth replacing worries of soaring inflation. The Delta variant could be the straw that breaks the camel’s back.

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