Is it all relative?

All eyes may have been on the Jobs Report last Friday but the biggest winner of the day was the United Kingdom, where the overwhelming victory by the Conservative Party in last week’s general election helped send British-oriented funds soaring.  Two of our biggest Quant movers last week can thank the election, the First Trust United Kingdom AlphaDEX Fund (FKU) and the iShares MSCI UK Small Cap Index (EWUS), but diving deeper gave us more reason to be cautious than optimistic as we scoured the ETF globe to find strong momentum that might face troubling times ahead.

Both FKU and EWUS saw their weekly ETFG Behavioral scores skyrocket last week, but they didn’t make that list based on the change on a % basis.  There’s been strong bias towards the buy side since the general election on March 30th.  FKU and larger rival iShares MSCI UK Index (EZU) were down 4.86% and 5.71% respectively compared to a loss of 1.46% for the broader iShares MSCI ACWI ETF (ACWI) in March but both funds poured on gasoline as punters took the position that the uncertainty over the outcome was confined mostly to the media and helped both funds outperform ACWI by a factor of 2 from April 1st through May 8th. With the elections behind us, will uncertainty over the role of the Scottish National Party and the possibility of a British exit from the Eurozone provide enough of a damper to help keep the strong momentum going or will the fire burn itself out as investors look for the next overlooked market?

One country that’s sure to be on traders lips is China where on Sunday the PBoC announced the third rate cut since last November, taking lending and deposit rates down another 25 bps.  While the headlines around the rate cut have emphasized the need to add more liquidity to China’s faltering economy where protracted economic weakness has put the 2015 GDP target of 7% in doubt (or not if you take the official statistics with a grain of salt), the real speculation is on whether the real prime mover is the Federal Reserve.  Thursday and Friday’s data releases may have helped UUP put in a floor close to $24.75 and the news could be very troubling for the Chinese Yuan, still pegged to the U.S. dollar.  The dollar’s strength against the Japanese Yen has helped their competitiveness against China and was just one of the reasons why the A-share market funds like the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) cooled off in the first quarter as the dollar made strong gains.  Our ETFG Behavioral Quant scores have steadily cooled off over the last month for most A-share funds but short interest remains high and it remains to be seen if the rate cut can counteract the power of the Fed.

Unfortunately, there’s no neat bow to put on last week’s market action here at home as Friday’s powerful move across global equities put nearly the entire S&P 500 into the green for the day with only a few observations to be gleaned from the performance of State Street’s select sector funds. Energy stocks (XLE) and materials (XLB) both outperformed nearly every other sector on the day although only XLE closed near the high while those traditional defensive plays like utilities (XLU) and consumer staples (XLP) both underperformed the broader market and closed well off their highs as did the SPDR Dow Jones REIT ETF (RWR) despite as the gap open higher proved too tempting to sellers.  The only strong change worth noting among the select sector funds were the financials (XLF) where the Jobs report restored hopes that rates might be rising sooner (and higher) than investors had been anticipating and taking the pressure off net interest margins at some of the country’s largest institutions.  XLF’s quant score has been steadily rising as investor enthusiasm (and momentum) returns to the financials and with the long term score still below the short-term, maybe bank stocks will finally have their day.

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