Continuing Investor Confidence

Monday, June 5, 2017 - Several major stock indexes around the world surged to record highs this past week, propelled by investor confidence in global economic growth and corporate earnings. These record gains were registered in the face of an increasingly precarious political backdrop. In addition to the escalating investigation into Trump-Russia collusion and its adverse implications for the passage of pro-growth legislation, political uncertainty was compounded this week by fraying transatlantic ties. After refusing to endorse NATO's collective defense clause, withdrawing from the Paris climate accord, and delivering a sharp rebuke of Germany's trade policies, the US longstanding cohesion and cooperation with EU countries was suddenly cast into doubt. The US increasingly inward looking foreign policy threatens to unsettle the close transatlantic relations that have underpinned the post-WWII international order and has added another layer of uncertainty to our already embattled administration. These developments occurred alongside the continued descent of oil prices, a downgrade in China's credit rating by Moody’s, a drop in US treasury yields to a seven month low.

Despite this rising undercurrent of political tumult and waning growth expectations signaled by the bond markets, the DJIA, S&P 500, NASDAQ joined global indexes like South Korea's Kospi and Germany's DAX to close at record highs on Friday. With the results from nearly every S&P 500 company being released, corporate earnings are up 14% from a year ago. Friday's job report, despite coming in slightly lower than expected, was received by investors as solid enough for the Federal Reserve to continue on its path of interest rates increases later this month. Additionally, global inflation, manufacturing, and other economic data releases pointed to continued, albeit slow, economic expansion. This surge in equities helped fuel another solid week of inflows for ETFs.

ETFG Fund Flow Summary - According to our fund flow summary, US listed ETFs attracted $13.6 billion is fresh inflows this week, bringing year-to-date inflows to over $200 billion. International equity ETFs continued to be a source of focus for investors, as they amassed $3.5 billion in creations this week. US equity ETFs reversed its trend of four consecutive weeks of outflows, after posting over $7 billion in creations. US fixed income ETFs also had a strong week with over $2 billion in inflows.

As domestic equity indexes rose to record highs this past week, it comes as no surprise that several of their index-tracking counterparts populate the top 10 inflows list this week. SPDR S&P 500 ETF Trust (SPY) was the leader in inflows this week, with over $6 billion in creations. PowerShares QQQ Trust (QQQ) finished 4th in inflows, with over $464 million, followed by iShares Core S&P 500 ETF (IVV) and Vanguard S&P 500 ETF (VOO), which finished 7th and 10th respectively with $352 and $294 million. The top 10 list was rounded out with several international ETFs, including iShares MSCI EAFE ETF (EFA) and Vanguard FTSE Europe ETF (VGK), and a couple of fixed income ETFs, like iShares 3-7 Year Treasury Bond ETF (IEI).

Continued worries over the enduring oil glut and a flattening yield curve, led several energy and financial based ETFs to register some of the largest redemptions this week. Energy Select Sector SPDR Fund (XLE) and SPDR S&P Oil & Gas Exploration & Production ETF (XOP) posted the 3rd and 8th largest redemptions this week, with outflows totaling $203 and $130 million. SPDR S&P Regional Banking ETF (KRE) was 10th in outflows, as investors withdrew $116 million from the fund.

Although equity markets have proven to be incredibly resilient this year, they face a series of potentially destabilizing events this week. With former FBI Director James Comey's testimony, the ECB monetary policy meeting, and the UK's snap election all set to take place on June 8^th, significant risks loom for the markets this week.

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