ETFs Making Moves After Historic Stock Drop

March 09, 2020

Fresh fears about the coronavirus and a shocking decline in oil prices ignited another wave of volatility in financial markets on Monday. The S&P 500 dropped as much as 8%, triggering a Level 1 marketwide circuit breaker for 15 minutes (read: How Trading Halts Impact ETFs).

ETFs like the SPDR S&P 500 ETF Trust (SPY) and the Vanguard Total Stock Market ETF (VTI) were last trading down by 7.6%, pushing losses since the market peak of three weeks ago to more than 18.9% (19.2% at the day’s low).

Many investors consider a 20% peak-to-trough decline as the dividing line between a bull market and a bear market, so all eyes will be watching to see whether the S&P 500 can hold the 2,709 level.

S&P 500 Approaches 20% Threshold

Collapsing Energy Sector

In addition to fresh news about the spread of the coronavirus to more states and countries, investors were grappling with a shocking collapse in the price of oil and energy stocks on Monday. WTI crude oil prices fell as much as 33.8%, their largest single-session decline since 1991, after Saudi Arabia indicated it would be hiking production dramatically, just as demand slows down rapidly (read: Energy ETFs Collapse As Oil Craters).

Oil’s plunge set off steep losses in the United States Oil Fund LP (USO), down 25.3%; the Energy Select Sector SPDR Fund (XLE), down 20.1%; and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), down 36.9%.

The move also fueled trepidation in junk bond markets, as investors anticipated potentially billions of dollars’ worth of defaults by struggling energy firms.

The iShares iBoxx USD High Yield Corporate Bond ETF (HYG) lost 4.3% on the session.

XLE In A Free Fall

 

Treasury Yields Approach Zero

While stocks were getting hammered on Monday, the usual safe-haven areas were surging. The U.S. 10-year Treasury bond yield dove by a quarter of a percent to last trade around 0.50%. It reached an intraday low of 0.31%.

At the same time, the 30-year Treasury yield dipped by 40 basis points to last trade at 0.89%. Its low for the day was 0.70%.

The iShares 7-10 Year Treasury Bond ETF (IEF) and the iShares 20+ Year Treasury Bond ETF (TLT) rallied 0.9% and 2.7%, respectively, on the session.

Investors are now wondering whether the rally in IEF and TLT, which have risen 10.5% and 26.8%, respectively, year to date, can continue, and whether rates in the U.S. can move into negative territory as they have in Japan and the eurozone.

Meanwhile, unlike Treasuries, gold’s rally stalled on Monday. Prices for the yellow metal got as high as $1,703/oz.—a level not seen in seven years—but were last trading flat on the day around $1,670. The SPDR Gold Trust (GLD) still holds a 10% year-to-date gain.

10-Year Treasury Yields Not Far From Zero

 

11-Year High In The VIX

In their efforts to preserve capital, investors are also hedging aggressively with options today. The Cboe Volatility Index (VIX) spiked as high as 62.1 on Monday, the highest print for the index since the financial crisis.

ETFs that track VIX futures, like the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX) and the VelocityShares Daily 2x VIX Short-Term ETN (TVIX) surged 23.9% and 49.7%, respectively, on Monday.

Highest VIX Since The Crisis

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2

 

 

 

 

 

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