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An Overlooked Loser In The Trade War: The VIX

Wayne Duggan

The international trade war among the U.S., China and Europe may have investors uneasy, but you wouldn’t know it by looking at market volatility. After spiking back in February, the CBOE S&P 500 Volatility Index is down about 30 percent in the past three months, suggesting the market may be pricing in a quick resolution to the trade war.

The VIX surged more than 200 percent in February to its high of the year during a steep market sell-off. Since that time, it has steadily drifted lower despite a breakdown in international relations. Last week, the VIX dipped to around 73 percent below its February high.

Investors Shrug Off Trade War

President Donald Trump has been steadily ramping the trade war since he first imposed tariffs on imported solar panels in January. Yet many analysts and investors seem to think the trade war will be short-lived.

“While Trump has significant leverage in the short term by virtue of being able to target more imports than the Chinese, this advantage is fleeting,” Height Capital Markets analyst Clayton Allen said last month.

Trump is likely motivated to end the trade war quickly to avoid media backlash and the potential overshadowing of Republican talking points of tax reform and a booming economy ahead of midterm elections in November, Allen said.

No Reason To Panic

U.S. business is booming, with many companies reporting record earnings and above-consensus growth numbers. While investors may be watching the trade war closely, it’s difficult to project a major disruption when fundamentals are sound. 

CBOE said earlier this year that it is working on improving the VIX settlement process amid accusations that traders have been manipulating the index.

At least one deep-pocketed trader is betting on another uptick in volatility in the near future. Last month, the enigmatic “50 Cent” trader — who made a killing during the VIX spike in February — returned to the market by placing a new series of bets on a rising VIX. Macro Risk Advisors estimates the anonymous trader earned about $183 million from their first round of volatility bets.

Price Action

While traders continue to search for the next volatility catalysts, here’s a look at how some popular volatility ETFs have performed in the past three months:

  • BRCL BK IPTH S&P 500 VIX SH FTRS ETN (NYSE: VXX) is down 31.2 percent.
  • PROSHARES Tr II/VIX SHORT TERM F ET (NYSE: VIXY) is down 31.4 percent.
  • PROSHARES Tr II/ULTRA VIX SHORT TER (NYSE: UVXY) is down 45.1 percent.

Related Links:

A Trade War Primer: The Tariffs Imposed, Threatened, And Expected By The US, Canada, Mexico, China And The EU

The Enigmatic '50 Cent' VIX Trader Is Back

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