Monday, July 9, 2018

Trade Battles

Monday, July 9, 2018 - While the week was shortened and trading volumes were subdued by this week's Independence Day celebration, the broader economic arena remained rife with activity. Stocks continued to be whipsawed by the competing forces of encouraging economic data and escalating global trade tensions, as this week brought several important developments on both fronts. Worries about the sharpening conflicts between the U.S. and its global trading partners weighed on the markets throughout the week. These concerns were accentuated on Friday when the U.S. imposed its previously announced 25% tariffs on $34 billion of Chinese imports and, in response, China levied tariffs on a list of 545 American goods ranging from automobiles to agricultural products. In what amounted to the first official shots of a trade war, investors are increasingly concerned that this tit-for-tat escalation in trade tensions will drag the world’s two biggest economies into a protracted dispute that will derail global growth.

Yet, despite these concerns, stocks remained resilient led by the countervailing influence of a stronger-than-expected June payrolls report. In what is currently the largest jobs expansion streak on record, the U.S. economy added 213,000 jobs in June to mark a 93rd consecutive month of growth. Unemployment ticked slightly higher to 4.0%, but remains near an 18 year low, and wage growth remained tame enough at 2.7% to assuage fears of accelerating inflation and aggressive fed rate hikes. This upbeat report was able to override global trade unease and lift stocks to weekly gains.

For the week, the DJIA advanced 0.8%, the S&P 500 recorded a 1.5% gain, and the Nasdaq rose 2.4% in its largest one-week gain since May.

ETFG Fund Flow Summary - Against this week's fraught backdrop, U.S. listed ETFs managed to post positive weekly inflows. Following last week's $21.6 billion in outflows, U.S. listed ETFs attracted $670 million in inflows, which helped advanced total year-to-date inflows to $2.8 billion.

This week's advances in the broad equity indices ostensibly pointed to a risk-on attitude taking hold in the marketplace, yet the fund flow patterns reveal a different picture. Equity outperformance was belied by $1.2 billion in outflows as a group. Conversely, fixed-income ETFs drew nearly $2.8 billion is inflows.

This penchant for defensive oriented products is reflected in this week's list of top individual fund flow leaders, where bond and bond-proxy ETFs lead the way in creations. The iShares 20+ Year Treasury Bond ETF (TLT) was the inflow leader this week with $596 million in creations. Several other defensive oriented products populated the top 10, including the iShares Core U.S. Aggregate Bond ETF (AGG), Vanguard Real Estate ETF (VNQ), iShares 0-5 Year Investment Grade Corporate Bond ETF (SLQD), Utilities Select Sector SPDR Fund (XLU), and iShares 7-10 Year Treasury Bond ETF (IEF).

In contrast, equity-oriented products dominated this week's list of top outflows. iShares MSCI EAFE ETF (EFA) suffered the heaviest redemption with $797 million. Additionally, notwithstanding their outperformance, ETFs tracking each of the 3 major equity indexes finished the week among the top money losing funds. SPDR S&P 500 ETF Trust (SPY) ended the week third in outflows with $597 million, followed by $595 in withdrawals in Invesco QQQ Trust (QQQ), and $327 million in SPDR Dow Jones Industrial Average ETF Trust (DJIA).

Above all, this week's fund flow trends capture the current uncertainty in the marketplace and how investors are struggling to reconcile the conflicting signals of positive economic fundamentals and ominous trade developments.

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