The Cboe Volatility Index and VIX-related exchange traded funds spiked on Monday as the S&P 500 was on pace for its biggest three-day pullback since May, with traders focused on rising COVID-19 Omicron infections and President Joe Biden’s economic agenda at risk.
Among the best-performing non-leveraged ETFs of Friday, the iPath Series B S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) increased 6.3% and the ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) advanced 6.2%. Meanwhile, the CBOE Volatility Index climbed 10.2% to 23.8.
Some traders attributed the heightened volatility in the U.S. markets to diminished liquidity, especially during the holiday season when many are spending time with family.
“The selloff is influenced by year-end volatility and new fears on growth due to the omicron variant,” Antonio Amendola, a portfolio manager at AcomeA Sgr, told Bloomberg. “That said, we need to remain selective on stories with greater solidity and ability to preserve margins in inflationary contexts. At the relative level, small and mid caps are better than large caps.”
Meanwhile, the rising rate of infections in the more easily transmissible Omicron variant has fueled concerns that global economies could once again re-instate lockdown measures during the holidays.
“There’s kind of two dynamics going on in the market. Probably the most important one is the imminent reduction in liquidity,” Jay Hatfield, chief executive officer at Infrastructure Capital Management, told Bloomberg. “On top of that, you have the omicron concern.”
Further adding to the uncertainty, Biden’s Build Back Better infrastructure spending bill is at risk. Goldman Sachs Group Inc. economists cut their U.S. economic growth outlook after Democratic Senator Joe Manchin blindsided the White House, rejecting Biden’s over $2 trillion tax-and-spending package.
“The market is lowering its expectations for growth due to omicron and lower liquidity as the year is ending is potentially amplifying the moves, so we have to be a bit careful of reading too much into the weakness,” Peter Garnry, head of equity strategy at Saxo Bank, told Bloomberg.
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