After another week of high volatility and powerful
currency movements (not to mention articles about active managers seriously
underperforming the market) even the most hardened global macro manager will be
sending out for cases of comfort food.
While it’s easy to fit their underperformance into the “passive is
always better” narrative, even Jack Bogle might be tempted to cut his active
colleagues some slack as the fallout from negative interest rates continues to
take a toll on the markets with the S&P 500 experiencing three trade days
last week with a greater than 1% movement not to mention the fact that real
yields on the ten-year Treasury slipped into negative territory last week
thanks to rising core inflation.
The truth is that investors are experiencing the
consequences of past decisions and the fallout from the early experiments with
negative interest rates. At first glance
it seemed so simple, negative rates would help spark inflation and with lower
rates it would substantially reduce the true “cost of money” encouraging
lending, spending and possibly curing male pattern baldness at the same
time. Instead it’s provoked a level of
anxiety among professional money managers that even readers of Zero Hedge might
consider excessive as the playbook that’s guided managers since 2011 has been
officially tossed out the window. But
we’re wondering if in their haste to find something that works, they’re being a
little too quick to get behind a new investment philosophy.
Some old rules still apply, starting with things that go
up will eventually come back down as those who are long the dollar continue to
discover their pain. Not that many people
are focusing on just the dollar although 2014’s big move in the PowerShares DB
Dollar Bullish Index Fund (UUP) reminded more than a few people of John
Murphy’s famous bump and run formation (or BARF) which usually ends in a major
pullback and with UUP finally closing below $24.50, it seems like a trip back
to $22.50 is in the offing. But dollar
weakness is old news and the Yen offers a much juicier story as more and more
investors wager that the BoJ, like the ECB, can only make rates so negative
which along with Janet Yellen’s uber-dovish stance helped send the CurrencyShares
Japanese Yen Trust (FXY) surging over 3.2% for the week on volume more than 4X
what you would see in a normal week. The
WSJ and FT are full of articles talking about traders hoping that the Fed
continues to deliver the pain to the dollar but short covering was a more
likely motivating factor as Yellen’s uber-dovish stance continues to cut the
legs out from under those who hoped the dollar could repeat 2014’s success
story which would explain the 21% drop in FXY’s assets last week along with a
20% drop in outstanding shorts.
Whether short covering or not, the end result was the
same with hedged Japanese equity funds seeing a major drop in their ETFG Behavioral
scores last week led by the WisdomTree Japan Hedged Tech, Media and Telecom
Fund (DXJT) with a 37% drop on a 4.55% loss for the week although the tiny fund
did manage to recover a large chunk of its losses with a nearly 4% gain on
Friday. It’s been a wild ride for DXJT investors over
the last year; the fund was hovering close to $30 in mid-2015 before pullback
in the run-up to the Fed’s rate hike plans later in the year sent the fund
plummeting to $20 in February and a similar story has affected nearly every fund
in WisdomTree’s Hedged Japanese equity fund line-up. Turns out DXJT wasn’t the leader in a new trend
but the last fund to feel the burns as the fund is now down over 13% in 2016
although investors should consider themselves fortunate compared to holders of
the WisdomTree Japan Hedged Equity Fund (DXJ) which you won’t find on our list
of biggest weekly movers as its behavioral score has long since backed off its
highs as over $3 billion has been pulled from the fund in the last three months
while losing over 17% in 2016.
Volatility and international equities are going to be a
running theme here but while the media is fascinated by Japan and the Yen,
investor interest in Latin American equity funds continues to wane. Our ETFG Behavioral Top Scorers continues to
be dominated for yet another week by the iShares MSCI Brazil Fund (EWZ) whose
6.4% gain on Friday was almost enough to push the fund back into the black
after four straight days of losses. The
fact EWZ continues to dominate the Behavioral Lists isn’t terribly exciting, in
fact it’s probably to be expected after years of double digit losses made it
one of the most despised international funds in the market (and boosted its
implied volatility) while its recent success has led to a major climb in its
short interest ratio which kept the fund in the top spot despite its inability
to get above $27. What’s more
interesting to us is that while EWZ might still be gathering headlines, waning
price momentum has knocked nearly every other Latin American equity fund off
our Behavioral list with the iShares Latin American 40 ETF (ILF) having fallen
all the way to the #94 spot while the iShares MSCI Chile Fund (ECH) has dropped
off the list and the iShares MSCI All-Peru Fund (EPU) was one of this week’s
biggest behavioral losers. If Latin
American funds were one of the early winners of the breaking of the buck, does
their lackluster performance now signal a bigger shift is ahead.
Ultimately, every winner in this latest rally depends on
a weaker dollar and while Janet Yellen has done everything she can to help, the
ultimate burden will be on other central bankers to weaken their own currencies
in the race to the bottom. Given the
willingness of the Bank of Japan to intervene in currency markets and extensive
history of doing just that, how willing are you to step in front of the BoJ
even for just a day?
Thank you for reading ETF Global Perspectives!
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