Volatility ETFs soar as inflation hits 4-decade high
The CBOE Volatility Index and VIX-linked exchange-traded funds jumped on Friday after new data showed inflation accelerated to a four-decade high.
The iPath Series B S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) increased by 2.4% and the ProShares VIX Short Term ETF (NYSEArca: VIXY) advanced 6.2% on Friday. Meanwhile, the CBOE Volatility Index jumped 8.6% to around 28.3.
Meanwhile, the S&P 500 was down 2.5% on Friday, with all 11 major sectors in the red.
U.S. markets fell after the Labor Department revealed the consumer price index rose 8.6% in May, the fastest pace since December 1981, The Wall Street Journal reported.
“It was quite warm. This report suggests underlying inflationary pressures remain quite strong,” Aichi Amemiya, senior U.S. economist at Nomura, told Reuters.
A number of factors, including rising fuel prices, supply chain issues related to Russia’s war in Ukraine, as well as lockdowns related to China’s zero-tolerance strategy against COVID-19 , have exacerbated inflationary pressures.
“Given everything from the implications of Russia’s invasion of Ukraine, Chinese lockdowns, and sheer appetite for travel… What we’ve seen is the perfect storm of these hitting factors, as well than some major refinery shutdowns,” Sarah House, senior economist at Wells Fargo Securities, told the WSJ.
High levels of inflation have added more uncertainty about the next course of action the Federal Reserve will take. Fed officials have already signaled their intention to fight rising consumer prices, and the worse-than-expected outcome has led many to anticipate that the central bank may take even more aggressive action.
“The bet in September was 50-50 between 25 basis points and a 50 basis point upside, and now that’s definitely gone to 50 basis points,” Art Hogan, chief market strategist at Reuters, told Reuters. National Securities.
Investors expect the Fed to continue raising rates by 50 basis points next week and into July. Some even warned that the Fed might consider a 75 basis point hike.
“[W]We think the US central bank now has good reason to surprise markets by increasing more aggressively. Still, “we realize this is a close call and could play out in June or July,” Barclays economists said in a note after the consumer price index for May was released.
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