Monday, September 14, 2015

Calm Before the Storm

Portfolio strategists released a collective sigh of relief last week as the lack of market mayhem in China and the Fed’s quiet period before the next FOMC meeting helped global equity markets break the “all or nothing” pattern that’s been so dominant over the last several months.  As we often say at ETF Global, when calm is restored, the last shall be first and in this case the results were almost predictable with some of the most beaten down sectors finally showing signs of life.  A nearly 11% rally by the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) was nothing to sneeze at but we hope you enjoyed it while it lasted because that sense of calm is sure to be shattered later this week when Janet Yellen faces the media on Wednesday afternoon. Before that happens, we’re turning back to our ETFG Quant report to find out where the action was strongest and who could stand to benefit the most if the Fed does or doesn’t hike this week.

Traders are keeping a close eye on the U.S. dollar in the run-up to the next announcement by the FOMC and while macro titans like Mohamed El-Erian say it’s a toss-up, you certainly couldn’t tell by looking at the Power Shares DB US Dollar Index Bullish Fund (UUP) which dropped nearly 1.2% last week and has seen over $200 million in assets leave the fund in the last month.  And if the dollar is dropping, the Euro must be rising and while the CurrencyShares Euro Trust (FXE) was up 1.75%, the biggest winners last week were unhedged European equity funds with the iShares MSCI EMU Index (EZU) and the Vanguard FTSE Europe ETF (VGK) both making our short list for strongest weekly behavioral score gains.  In terms of momentum, it’s been a roller coaster year for both funds with EZU’s short-term momentum in its lowest decile within the last two weeks as overseas investors fled home seeking safety and helped stabilize the dollar, but the negative economic data points released on Thursday and Friday helped knock uncle Buck’s legs out from under him and EZU and VGK were there to take advantage of it with their behavioral scores surging 81% and 65% respectively.  But they weren’t the only funds hog piling on the dollar as a number of country specific funds pushed their way back onto our top behavioral funds list with one frequent visitor, the iShares MSCI Italy Capped ETF (EWI), reappearing at #15.

Strategists got a further reprieve as foreign stocks weren’t the only ones to stage a comeback last week with the performance spread between the best and worst performing domestic sectors (technology and not surprisingly energy stocks) reaching 361 bps last week although even that fails to tell the full story.  While the Energy Sector Select SPDR may have been down .66% last week, the fallout from Goldman Sachs latest missive lowering their expectations for crude and natural gas prices was severe.  Among the worst hit was the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) which ended the week down 1.96% as Goldman speculated in its note that the financial woes from cratering energy prices could spread to older and more financial established operators rather than being limited to their younger and more heavily levered counterparts with higher production costs.  But the worst pain was felt by MLP funds as investors fled en masse.  See the contrast in the performance of the largest MLP ETF, the Alerian MLP fund (AMLP), which ended the week down 2.94% with the another old favorite that found favor during the Fed’s quiet period, the iShares Nasdaq Biotechnology ETF (IBB), that ended the week up 5.23%, a spread of over 800 bps in one week!

The life of the strategist isn’t an easy one, always combing through data looking for trends and patterns, wondering if whatever relationship you find will hold true in the future which is one reason why we’re excited to see what happens when the Fed does hike rates, whether this month or another.  The lowest rungs of our behavioral models are dominated by funds hit hardest by the anticipated fallout from an eventual rate hike, as we mentioned last week funds whose names contain the words “global” or “emerging” tend to predominate.  But what will happen when the Fed does hike?  The Fed has one surprising group advocating for a hike, emerging market central bankers who argue that continuing to do nothing is worse than a hike itself.  According to a September 9th article in the Financial Times (“Emerging markets call on Fed to lift rates and end uncertainty”), central bank governors in Indonesia, Peru and India all feel that the sooner that Fed acts, the sooner certainty and direction can be restored to the market.

Thank you for reading ETF Global Perspectives!

Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice.  ETF Global LLC (“ETFG”) and its affiliates and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively ETFG Parties) do not guarantee the accuracy, completeness, adequacy or timeliness of any information, including ratings and rankings and are not responsible for errors and omissions or for the results obtained from the use of such information and ETFG Parties shall have no liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of such information. ETFG PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.  In no event shall ETFG Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the information contained in this document even if advised of the possibility of such damages.

ETFG ratings and rankings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions. ETFG ratings and rankings should not be relied on when making any investment or other business decision.  ETFG’s opinions and analyses do not address the suitability of any security.  ETFG does not act as a fiduciary or an investment advisor.  While ETFG has obtained information from sources they believe to be reliable, ETFG does not perform an audit or undertake any duty of due diligence or independent verification of any information it receives.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.  Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.  Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested.  Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.  Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.