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XIV Is Dead: Credit Suisse Pulling the Plug on Inverse Volatility Product

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Selling volatility has been a sure money maker since Donald Trump was elected president some 14 months ago. But that all came undone last week when a jaw-dropping rise in the CBOE VIX obliterated one inverse volatility product.

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End of the Road for XIV

Trading of the VelocityShares Daily Inverse VIX Short-term exchange-traded note (XIV) will officially cease on Feb. 20, according to Credit Suisse, the product’s issuing bank. XIV, which is designed to give the opposite return of the CBOE VIX Volatility Index, nosedived Feb. 5, triggering an “acceleration event” for the fund.

“On the acceleration date, investors will receive a cash payment per ETN in an amount equal to the closing indicative value of XIV on the accelerated valuation date,” Credit Suisse said in a statement. “The last day of trading for XIV is expected to be February 20, 2018.”

The XIV collapsed because of an unprecedented rise in the VIX. The so-called “fear index” spiked 115% on Feb. 5 for its largest ever single-day advance. Because XIV is designed to perform inversely with the CBOE VIX, it trades in the same direction as the S&P 500 Index – only at three-to-five times the speed.

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U.S. stocks just rounded out one of their worst weeks since the financial crisis, with the S&P 500 Index plunging more than 5%. Losses of this magnitude were enough to spike the VIX and tank products that offer inverse exposure.

Prior to last week, the XIV had dramatically outperformed the broader market, with returns of 1,200% since inception in 2010. By comparison, the S&P 500 had doubled over the same period.

To get a sense of just how dramatic the fall in XIV was, consider that the fund had nearly $1.9 billion in assets on Jan. 31. Just six days later, total assets had dwindled to just $110 million.

The XIV had at least two other close calls over the years, the first being in 2011 when the United States had its credit rating downgraded by Standard & Poor’s. As the stock market plunged, XIV fell 71% over a three-week period. A similar loss happened in 2015 after China’s devaluation of the yuan triggered a global panic sale in equities. In both instances, the XIV managed to recover.

A Warning for Other Inverse Products

The equity market’s massive slide put other volatility-related funds on the rope, including the ProShares Short VIX Short-Term Futures (SVXY). The fund is trading at a mere fraction of where it was more than a week ago, although ProShares has assured investors the product was doing what it was meant to do.

The fund manager told clients following the Feb. 5 crash that “the performance on Monday  [Feb. 5] of the ProShares Short VIX Short-Term Futures ETF (SVXY) was consistent with its objective and reflected the changes in the level of its underlying index.”

Although XIV and SVXY have almost identical characteristics, the former is an ETN and the latter is an ETF. But this difference has nothing to do with SVXY surviving the “Black Monday” crash. Despite its apparent vulnerabilities, the decision to continue SVXY was a management one. However, there is no guarantee it too won’t be terminated in the future. Based on the stock market’s recent performance, another test of volatility could be just around the corner.

 

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 403 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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Market Overview

Rome wasn’t built in a day

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As blockchain week in New York winds down, we’re seeing several articles like this one

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What the writers of these articles fail to realize is the underlying principle behind the so-called “consensus effect” and what it’s all about.

This is not “pump” and it was never about speculation or crypto trader exuberance. The theory championed by Tom Lee and others is about the construction of infrastructure.

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During the event, we witnessed a flurry of exciting product launches, new partnerships, groundbreaking initiations, and investment commitments. These are the type of things that tend to have a large impact on market prices, but not instantly.

In the last three years, we have seen that bitcoin stayed flat for weeks after the Consensus conference and then took off about a month later. This graphic does a rather good job of displaying the delayed fuse…

Our CEO and co-founder of eToro Yoni Assia took the center stage several times during the conference and this morning wrote us a powerful letter. Here is small excerpt…

Rome wasn’t built in a day.

@MatiGreenspan
eToro, Senior Market Analyst

Today’s Highlights

  • Rome Rebuilt
  • Chinese Stocks Boost
  • The Bitcoin Chart

Please note: All data, figures & graphs are valid as of May 18th. All trading carries risk. Only risk capital you can afford to lose.

Traditional Markets

In the last hour, Italy’s Five Star Movement has announced that they’ve finalized a contract with the League, and will vote on it shortly. It looks like the nation will finally have a working government, possibly as soon as this weekend.

The good news is that it seems they will not be asking the EU to write off their €250 billion debt. The idea was gaining traction within the country, but as we saw with Greece not too long ago, it would be very difficult to get any European leaders to simply erase a mountain of debt.

Some of the highlights of the deal do include….

A quick glimpse at Italian bond yields shows that investors aren’t exactly thrilled with the new plan.

Putting it in perspective, we can see that the new updates are far more impactful than the recent election…

eToro’s top Italian analyst writes…

The main issue is: how do they think they will get the necessary financial coverage for those reforms? (Citizenship Income, Pension Fornero’s Law, Flat Tax)
Do they really think that Brussels will allow them to create new spending initiatives (immigration for example) without batting an eyelid?
It does not seem like the new coalition will have the necessary strength to get the weight in a Europe to affect any real change.

-Gabriel Debach
eToro, Italian Market Analyst

No Worries

If the international markets are concerned about any of this, it sure isn’t showing up in asset prices today. Stocks are mostly flat around the world, with the exception of the China50, which is flying…

This could be due to a softer outlook for the US-China trade negotiations, or possibly just because the index is currently 15% from the top.

Either way, it’s the only real mover today other than crypto.

Crypto Drop

Digital assets went through a mild sell-off last night. Bitcoin fell through support at $8,250 and is now barely holding $8k.

The good news is that the alleged Upbit scandal that smacked EOS and the rest of the crypto markets seems to be resolved now. Bad news always travels faster than good news. Though there was a sell-off when this news hit, the resolution doesn’t seem to be having an opposite effect.

Nothing affects sentiment like price, and as the price drops it is important to put things into perspective. This graph shows the long-term trend line that’s been a foundation of support for the market in the last few months.

Judging by this, it is a distinct possibility that we’ll be testing this line again circa $7,100. The blue line (200DMA) and the round level of $10k will certainly be a hard walnut to crack, but if we do somehow get on top of it…

Let’s have an amazing weekend!

This content is provided for information and educational purposes only and should not be considered to be investment advice or recommendation.

The outlook presented is a personal opinion of the analyst and does not represent an official position of eToro.

Past performance is not an indication of future results. All trading involves risk; only risk capital you are prepared to lose.

Cryptocurrencies can widely fluctuate in prices and are not appropriate for all investors. Trading cryptocurrencies is not supervised by any EU regulatory framework.

 

Best regards,
Mati Greenspan
Senior Market Analyst

eToro: @MatiGreenspan | Twitter: @MatiGreenspan | LinkedIn: MatiGreenspan | Facebook:MatiGreenspan

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 85 rated postsSenior Market Analyst at Etoro.com.




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Market Overview

Market Update: Stocks Give Up Gains as Treasury Yields Climb

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U.S. stocks struggled to hold gains Thursday, as rising bond yields pressured the major indexes ahead of a planned interest-rate hike next month.

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Stocks Drift Lower in Afternoon Trade

All of Wall Street’s major indexes closed well off their daily highs, with the S&P 500 Index finishing down 0.1% at 2,720.13. Only four of 11 primary sectors reported clear-cut gains, with energy shares jumping more than 1%. On the opposite side of the ledger, utilities and telecom were the biggest decliners.

The Dow Jones Industrial Average fell 54.95 points, or 0.2%, to close at 24,713.98. Meanwhile, the technology-driven Nasdaq Composite Index slipped 0.2% to 7,382.47.

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The CBOE VIX – a measure of anticipated volatility over the next 30 days – held lower on Thursday, reflecting underlying calm on Wall Street. The so-called “fear index” closed at 13.43 on a scale of 1-100 where 20 represents the historic mean.

Stocks were pressured once again by rising bond yields, with investors continuing to bet on higher interest rates to tame inflation. The yield on the benchmark 10-year U.S. Treasury more leaked at 3.1% Thursday, the highest since 2011.

Geopolitics Drive Commodities

Geopolitics was the main focus for commodity traders Thursday, as investors became more convinced that Iranian sanctions would limit crude exports from the Persian Gulf.

According to some analysts, restoring sanctions on Iran could disrupt oil shipments from the country by as many as 1 million barrels per day.  Others say the impact won’t be nearly as severe given continued support for the Iran nuclear deal by China and America’s European allies.

Oil prices on Thursday rose to their highest level since 2014, with Brent crude topping $80 a barrel on London’s ICE Futures exchange. In New York, West Texas intermediate (WTI) broke above $72 a barrel.

Crude prices rallied even as the U.S. dollar reached its highest level in five months. A stronger dollar often dissuades international investors from purchasing commodities denominated in the U.S. currency. The U.S. dollar index (DXY) reached a daily high of 93.57.

Cryptocurrency Prices Struggle for Direction

The cryptocurrency market fell deeper below $400 billion on Thursday, as prices failed to build off overnight gains. The market’s total capitalization fell to $376 billion after peaking at around $390 billion, latest figure from CoinMarketCap show.

Digital currencies have struggled for momentum in recent weeks even as the value proposition for investing increased. The blockchain industry is brimming with confidence on signs of wider institutional adoption, growing use cases and support for innovation from governmental agencies.

Though bitcoin prices have struggled below $9,000 this week, a former trader at JPMorgan Chase recently predicted new record highs for the digital currency this year.

Danny Masters, who now chairs investment firm CoinShares, believes prices are destined for $20,000 this year as market structures continually improve.

“We need to see the custody solutions come and be provided. We need indices and we need performance measures where we can actually start to understand what we’re talking about and measure our performance,” Masters said, as quoted by CCN.

Bitcoin drifted 1.5% lower on Thursday to trade around $8,200.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 403 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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Market Overview

US Dollar Unhinged

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Hi Everybody,

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One of the trickiest questions I’ve ever been asked by a journalist was: Aren’t cryptocurrencies just an easy way for rogue governments to skirt international sanctions?

I was stumped. Certainly, we can all see the value in a currency that operates independently of governments and banks, but does that mean that adherence to globally recognized standards is history?

For the ICO market, we’ve seen that many of the more obvious scams were called out rather quickly by the community. Unfortunately, some may have fallen foul of these scams, not nearly as much money has been lost as it has in other types of scams.

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After some consideration, the above argument bears similarities to that around free speech. Should we allow people to voice harmful opinions? The classic answer to that is “yes.” For fear of repressing the oppressed, we should allow all to speak and let the validity of their arguments carry, or drown.

@MatiGreenspan
eToro, Senior Market Analyst

Today’s Highlights

  • Higher Yields
  • Italian Exposure
  • Unhinged Crypto

Please note: All data, figures & graphs are valid as of May 17th. All trading carries risk. Only risk capital you can afford to lose.

Traditional Markets

Bond Yields are tracking higher today, which does seem to be weighing down on the stock market at the moment.

Here’s a snapshot of the 10 year yield…

…and here are the stock markets over the last two weeks….

As you can see, the rally is having a difficult time climbing higher in the face of higher borrowing costs. Of course, the bond moves in the US are rather small compared to what’s happening in Italy right now.

The Italian 10-year has gone from 1.71 to 2.11 in the last month. For cryptotraders this may not seem like much but for the bond market that currently houses much of the world’s investments, this is a massive movement.

Within Italy itself, the situation is potentially explosive. Here we can see overall exposure that various banks have to Italian bonds. Notice the overwhelming presence of triple digit numbers here?

The silver lining here is that the fear of contagion is now far less than it was a few years back as it seems that most of the debt is confined to domestic banks.

Many thanks to one of our Italian traders on eToro for tagging me in this post

We’ve also recently highlighted the Turkish Lira, so here’s a current look at that. As you can see, it’s still falling sharply.

(Reminder: Inverted graph)

Crypto Unhinged

Though the possibility of the US Dollar losing its status as the global reserve currency is extremely low, over the course of history these types of things have happened before.

In the crypto market however, anomalies are far more commonplace. Stable coins are designed to allow people to transact using cryptocurrencies while reducing the risk that lies in the extreme volatility prevalent in this particular market.

Sometimes, things don’t exactly go according to plan though. Even though the TrueUSD coin seems to be more decentralized and transparent than previous versions of this concept, market forces can sometimes be stronger than economic theories.

In this case, the coin was introduced to a new platform, one of the largest in the industry, rather suddenly. This surge in volume caused the price to spike by 35% in the span of three hours, and it took the market an additional 10 hours to bring it back it’s intended level and even out.

The moral of the story is that though we can’t ever tell the future, we can make decisions on our investments to take advantage of both short term and long term shifts in valuation.

If your risk is all in one place than you’re either going to have a very good or a very bad time, probably both depending on the day. However, the more you diversify your portfolio into many different types of investments, the more you reduce your risk and in the end, you’ll likely be able to sleep a lot better at night.

As always, please continue sending me your excellent questions and comments. Let’s have an amazing day!

This content is provided for information and educational purposes only and should not be considered to be investment advice or recommendation.

The outlook presented is a personal opinion of the analyst and does not represent an official position of eToro.

Past performance is not an indication of future results. All trading involves risk; only risk capital you are prepared to lose.

Cryptocurrencies can widely fluctuate in prices and are not appropriate for all investors. Trading cryptocurrencies is not supervised by any EU regulatory framework.

Best regards,
Mati Greenspan
Senior Market Analyst

eToro: @MatiGreenspan | Twitter: @MatiGreenspan | LinkedIn: MatiGreenspan | Facebook:MatiGreenspan

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 85 rated postsSenior Market Analyst at Etoro.com.




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