Pandemic's latest spread triggers surge in VIX 'fear gauge' for U.S. stocks

2/2 © Reuters. FILE PHOTO: FILE PHOTO: Statue of George Washington at Federal Hall across Wall Street from New York Stock Exchange in New York 2/2

By April Joyner

NEW YORK (Reuters) - Wall Street's "fear gauge" is on track for its biggest weekly jump since March as investors worried about rising U.S. and European coronavirus cases, the lack of fiscal stimulus and uncertainty about the U.S. presidential election outcome.

The Cboe Volatility Index (VIX) surged on Wednesday to its highest level since June, ending at 40.28. At the same time, the benchmark S&P 500 (SPX) stock index fell 3.5%.

The VIX had climbed on Monday amid concerns about a tightening U.S. presidential race. With Wednesday's jump, the index has surged nearly 13 points this week.

Along with the pandemic, concerns about stalled efforts in Washington toward further fiscal stimulus measures and the outcome of Tuesday's U.S. presidential election have helped maintain high volatility in U.S. stocks. The VIX is now pricing in daily moves of more than 2%.

"Markets are confronting a perfect storm," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina.

Some investors have been preparing for bigger market gyrations for weeks. Assets under management in exchange-traded products that investors use to guard against a drop in U.S. stocks have steadily grown since mid-September.

Over the last month, the combined assets of the ProShares Ultra VIX Short-Term Futures ETF (O:UVXY) and the Barclays (LON:BARC) iPath Series B S&P 500 VIX Short-Term Futures ETN (P:VXX) have grown to $2.85 billion, a 20% gain, according to data from YCharts.

VIX futures, which have long reflected expectations for higher volatility toward year-end, have also risen. November futures, which capture the weeks following the election, were trading above 35 on Wednesday.

Even so, the VIX itself is trading at a higher level than the futures, an indication that immediate concerns about the coronavirus have dwarfed worries further out on the calendar.

Some investors, in fact, are readying for a somewhat calmer market at year-end and in early 2021. Since the beginning of the month, trading volume in VIX puts - options used to position for declines in the index - has outpaced that for VIX calls, used to protect against outsized market moves.

"Surprises are the thing that really get volatility going," said Christopher Murphy, co-head of derivatives strategy at Susquehanna Financial Group. "This next wave of coronavirus seems to have caught the market off guard a bit."