The CBOE Volatility Index and VIX-related exchange traded funds surged on Monday on fears of a contagion from problems in China’s property market that would spread to global markets.
Among the best-performing non-leveraged ETFs of Monday, the iPath Series B S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) increased 9.5% and the ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) advanced 9.3%. Meanwhile, the CBOE Volatility Index climbed 19.9% to 25.0, its highest level since mid-May.
“It’s a surprise Monday open,” Zhiwei Ren, a portfolio manager at Penn Mutual Asset Management, told the Wall Street Journal. “We are definitely being a little more cautious at this point.”
The broad market retreat came from concerns over property developer China Evergrande Group, with observers increasingly warning that Beijing could let Evergrande fail and cause steep losses for its shareholders and bondholders. The Chinese developer’s debt load is the highest for any publicly traded real estate management or development company in the world.
“This is a company based in China whose activities are overwhelmingly centered in China. That being said, we always are monitoring global markets, obviously from the Department of Treasury primarily, including the assessment of any risk to the U.S. economy and stand ready to respond appropriately if needed,” White House press secretary Jen Pskai said, referring reporters to the Treasury Department.
The concern over Evergrande was a perfect trigger for a broad selloff as investors have grown more cautious over the risk outlook, especially after the rally spanning much of the year. Market observers have also warned that valuations look pricey and cautioned that the economic recovery in the U.S. was weakening due to the the spread of the COVID-19 Delta variant.
“As of right now, I don’t see any systemic risk for the global economy from the Evergrande situation, but there doesn’t need to be any systemic risk in order for markets to be affected,” David Bahnsen, chief investment officer at The Bahnsen Group, a wealth management firm based in Newport Beach, Calif, said in an emailed commentary, according to Reuters.
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