When monetary policy leaders spoke in October, investors listened. Federal Reserve Open Market Committee (FOMC) member, James Bullard, suggested that his colleagues consider extending the U.S. central bank’s policy of buying bonds. In a similar vein, the European Central Bank (ECB) revived its activity of purchasing assets in its attempt to stimulate the region’s economy. Meanwhile, the Bank of Japan (BOJ) unexpectedly announced its intention to increase its balance sheet by acquiring additional stock and bond assets in 2015.
The correction that many had expected? Vanquished in a matter of weeks. In fact, from the moment that Bullard opened the quantitative easing (QE) door (10/16) to the day of the pledge of tens of trillions in yen by Japanese authorities (10/31), the S&P 500 SPDR Trust (SPY) rocketed 10% off its intra-day bottom.
The world’s semi-coordinated effort to fight deflation as well as pump up gross world product has sent a number of ETFs onto the list of New 52-Week Highs. For those who track currency trends, you will find a number of those exchange-traded trackers as well.
|New 52-Week Highs Demonstrate The Carry Trade Impact|
|YTD % (Approx)|
|ProShares Ultra Short Euro (EUO)||19.6%|
|PowerShares NASDAQ 100 (QQQ)||17.0%|
|ProsShares UltraShort Yen (YCS)||14.8%|
|Vanguard Total Stock Market (VTI)||10.1%|
|WisdomTree Japan Hedged Equity (DXJ)||9.3%|
Perhaps the most important data in the table above are the results for UltraShort Euro (EUO) and UltraShort Yen (YCS). Back on the 21st of October, scores of readers, journalists and clients asked if the worst of the selling pressure had ended. I told them that I thought that it had. However, I made it clear that the energy sector (e.g., oil prices, energy stocks, etc.) would need to stabilize and safer haven, “carry trade” currencies like the yen would have to weaken; the yen had been rising over the first two weeks of October. Sure enough, institutional investors began borrowing and shorting the yen once more so that they might use the proceeds from the low yielding currency to invest in higher yielding, higher appreciating assets. Not only did Ultra-Short Yen (YCS) hit a 52-week high, but the Currency Shares Yen Trust (FXY) had plummeted to six-year lows!
Lost in the euphoria? The cash that hedge funds, institutions and money managers raised – money from the yen and euro carry trade as well as money from the sale of assets during the first few weeks of October – is not pouring into every aspect of “risk-on” opportunity. Emerging markets are neither seeing the love in price appreciation or inflows. While the emerging market uptrend via Vanguard Emerging Markets (VWO) may still be intact, it remains well-off the pace it had set between February and September; also, VWO is approximately 8% off those September highs.
What will it take for investors to embrace emergers once again? It will probably require a Chinese commitment to some form of stimulus. The asset reflation game – the one that purports to drive consumers as well as businesses to borrow and spend – has been the critical component for investor enthusiasm since the official end to the Great Recession in June of 2009. Five-and-a-half years… why would anything change now?
Of course, it may be difficult to gauge enthusiasm for the amount or the timing of any Chinese fireworks. That’s why one might be better served to watch for the possibility of a relative strength revival from the basic materials sector. The emerging market run-up from February to September largely corresponded to SPDR Select Sector SPDR (XLB) success in the same time period. The XLB:S&P 500 price ratio’s recent fall from grace corresponds to the waning interest in emergers. It follows that if XLB regains its momentum over the broader S&P 500, emerging market ETFs like VWO will likely reconvene at the “risk-on” party.