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Euro ETFs On Volatile Ride: What Next?

Last week, the European Central Bank (ECB) hit headlines by extending its asset buying program by six more months to March 2017. The bank cut its deposit rate by 10 bps, shoving it deeper into the negative territory to -0.3%. ECB’s aim is to wipe out deflationary threats and boost economic growth in the common currency bloc. The markets did not appreciate the decision wholeheartedly as they expected an outsized expansion in the QE policy. To their utter disappointment, the ECB maintained the amount of monthly government bonds purchase at €60 billion. Additionally, the cut in deposit rates was also below the expected 0.15-0.20%. As a result, the common currency euro surged and logged its largest one-day gain against the greenback in over six years. The CurrencyShares Euro Trust ETF (NYSEARCA: FXE ) was up 3.2% on December 3. But since October, the euro has dropped over 5% against the greenback in anticipation of a very dovish act from the ECB. Several analysts are betting on the euro-dollar parity as the euro gained strength and the Fed is putting stress on a slower rate hike trail once it pulls the trigger. We expect the latest strength in the euro to be short-lived. After all, a recovering U.S. economy and a soft Eurozone economic backdrop will keep the monetary policy divergent for long. The Fed may apply a petite measure of hike now, but will likely speed up policy normalization once the economy gathers steam. Across the pond, the ECB might act more benignly if the present quantum and duration of the QE measure fails to pull up the sagging economy. Possibilities of further monetary easing by the ECB and euro’s thinning status as a reserve currency might result in a further slide in euro. Notably, after yuan’s inclusion in IMF’s SDR currency basket, euro lost its weight from 37.4% to 30.93 %. The move will take effect from October 2016. Investors should note that FXE is down 10.6% so far this year (as of December 4, 2015). Although, it is presently exhibiting a volatile trend on the double whammy of the ECB shock and the confusion over how fast the Fed will proceed on the rate hike path. Fortunately, ETFs offer several options to investors to accomplish this task. Below, we highlight a few choices in the inverse ETF space. These ETFs profit when the euro declines and may be suitable for hedging purposes against the fall in the currency (see all inverse currency ETFs here). ProShares Ultra Short Euro ETF (NYSEARCA: EUO ) This leveraged ETF looks to provide twice the inverse exposure to the performance of euro versus the U.S. dollar on a daily basis. The product has amassed over $500 million in AUM while it trades at a volume of 800,000 shares daily. However, given its active management style, the ETF charges a hefty annual expense ratio of 95 basis points. Though EUO lost 6.3% on December 3, the day ECB delivered a less-than-expected action, the fund crawled up over 1.5% on the day next as euro started paring gains. The product has enjoyed a gain of 18.2% on a year-to-date basis on a weak euro. Investors could book more profits off this fund should the euro continue to struggle. Market Vectors Double Short Euro ETN (NYSEARCA: DRR ) This is an exchange-traded note issued by Morgan Stanley. The product seeks to track the performance of the Double Short Euro Index. For every 1% weakening of the euro relative to the greenback, the index normally gains 2%. The choice is an overlooked one with just $54.8 million in AUM. The product charges an expense ratio of 0.65% a year. On a year-to-date basis, the product has advanced about 21% (as on December 4, 2015). It rose 1.84% on December 4, the day after the ECB action. Original Post

Will GLD Keep Losing Its Shine?

Summary The gold market is expected to be pressured down as the U.S. dollar resumes its upward trend and the Fed moves towards raising rates. The focus is shifting towards the Fed’s normalization path. The market estimates only two to three rate hikes next year. Shares of the SPDR Gold Trust ETF (NYSEARCA: GLD ) and price of gold climbed back up last week, in part as the U.S. dollar changed course and fell following the lower than expected rate cut by the ECB. In her recent testimony to Congress, FOMC Chair Yellen signaled the U.S. economy is ready for higher rates. And the last non-farm payroll report , in which 211,000 jobs were added back in November, reaffirmed market expectations for the Fed to raise rates this month. Labor market continues to improve The recent NFP report showed a bit higher than expected growth in number of jobs. Wages rose by 0.2%, month over month and by 2.3% for the year. And while not all figures in the report were good — the real unemployment (U6) edged up to 9.9% — it was still overall good enough to pave the way for a December rate hike. Thus, this jobs report along with Yellen’s testimony should have raised the implied probabilities of a rate hike but for now the odds are at 79% — little changed from the previous week. The problem with raising rates at this stage is that the core inflation is still low. And it will be even harder for inflation to rise as the Fed’s cash rates moves up. Nonetheless, as the Fed moves towards raising rates in the next meeting, the price of GLD could resume, even if over the short term, its downward trend. And once the FOMC raises rates this month, the median outlook the Fed targeted in September will be met, as indicated in the table below. Source: Fed’s website Even though the labor market is doing well enough to prompt the Fed to raise rates this month, this week the JOLTS report will provide another perspective about the progress of the labor market. The recent depreciation of the U.S. dollar, mainly against the Euro, came after the ECB didn’t introduce stimulus as the market expected. The recent break we had from the rally of the U.S. dollar has helped pull back up GLD. And the U.S. dollar is expected to resume its rally, which will keep pressuring down GLD. Looking beyond the upcoming rate hike, and assuming the Fed moves forward and raises rates this month, the outlook for the future hikes suggest only a few rate raises in 2016. If rates were to rise at a slower pace than previously expected, this could hold the price of GLD from falling next year. (click to enlarge) Source: Fed-Watch The table above shows the implied probabilities over the next FOMC meetings 2015-2016. Based on these figures, the market expects the target rate to reach 0.84% by the end of 2016 – over 0.5 percentage point lower than the FOMC’s median outlook of 1.375%. Based on the Fed-watch outlook, this implies two rate hikes next year of 0.25% (again, assuming the Fed were to raise rates this year). If this outlook will coincide with FOMC members’ estimates, then the Fed will revise down its projections in the next meeting. And downward revisions could partly offset the expected adverse impact the rate hike will have on GLD. If rates were to remain lower than currently expected next year, the downward pressure on GLD will be less intense. Bottom line The gold market isn’t expected to shine or see rising prices anytime soon, especially as the Fed moves towards raising rates in December and U.S. dollar keeps climbing against other currencies. But following the initial rate hike, which is likely to have a short term negative impact on gold prices, it will be more important to see how the Fed plans raising rates in 2016. The current market outlook aims towards only 2 to 3 hikes next year. Lower than previously estimated rates could hold GLD from plummeting, albeit this won’t stop the general downward trend. For more please see: ” Gold and Inflation – Is there is relation? ”

Surprise ETF Winners Post Job Data

The U.S. labor market latched on to strong job gains in November, sealing the chances of a Fed lift-off as early as in two weeks. The ‘headline’ jobs number came in at 211,000 for November, breezing past the estimated 200,000. In fact, the data for September and an already-sturdy October were also upgraded to reflect 35,000 additional jobs than earlier revealed. Notably, wages and the unemployment rate were also steady in November. The unemployment rate remained unchanged at 5% – a more than seven-year low level. The monthly tally for the last three months now averages at 218K. However, the labor market has room for further improvement. This is because the underemployment rate, which reflects part-time workers who’d wish a full-time placement and people who want to work but have stopped searching, inched up to 9.9% in the month from 9.8% in October, per Bloomberg . The labor forces’ participation rate remains at a multi-year low of 62.5% (minutely up from October). Average hourly earnings are rising off late but are far from creating wage inflation. The nudge in the underemployment metric, widely viewed as the Fed chief Yellen’s preferred benchmark for measuring the labor-market condition, hints at a slower rate hike trajectory once the Fed embarks on this path. After all, the economy is yet to attain the Fed’s 2% inflation goal. The economy has failed to reach that target after April 2012. Fed officials now expect a 74% probability of a hike, while the effective funds rate post hike is likely to be 0.375%, per Bloomberg. Market Impact While the broader market has already settled in with the looming liftoff this month, it has now started analyzing the pace of the rate hike. As a result, a good-but-not-outstanding job report, laden with a few loopholes, has strengthened the chance of a slow and small rate hike trail ahead. This produced a handful of surprise winners and losers post November job data. The belief is that when rates rise or a chance of a rise is higher, the greenback strength puts pressure on commodities and the bond market underperforms. But after the November job report, we noticed certain changes in sentiments in the investment dynamics as the market is now focusing more on a sluggish rate hike, not just the hike itself. Given this, we have highlighted ETF winners and losers from the November payroll report. Winners SPDR Gold Shares (NYSEARCA: GLD ) Gold bullions plunged to a six-year low level on a rising greenback and muted inflation globally. However, the bullion tested many lows already and the lift-off seems almost priced in, the bullion reversed its trend post job data. The bulls are back in the gold market as many analysts believe that the Fed will not react fast after initiating the policy normalization process. This gave the gold bullion ETF GLD a gain of over 2.2% on December 4, the day a steady job report published, defying the traditional investing theme. The fund added about 0.1% after hours. GLD is down over 8.4% so far this year (as of December 4, 2015). GLD has a Zacks ETF Rank #3 (Hold). iShares 20+ Year Treasury Bond (NYSEARCA: TLT ) This is a beneficiary of the positive economic momentum. Yield on the benchmark 10-year Treasury note dipped 5 basis points from the previous day to 2.28% on December 4 whereas yield on the 20-year note declined 7 bps to 2.65% on the same date. As a result, treasury bonds rose after the payroll data. Long-term U.S. bond ETF TLT was up about 0.9% in the key trading session. The fund has a Zacks ETF Rank #2 (Buy). iShares Select Dividend (NYSEARCA: DVY ) This high dividend ETF also flouted the traditional conviction that income investing slackens in a rising rate environment. Since yields on longer-term treasury bonds fell, investors rushed toward high income instruments. DVY yields about 3.29% (as of December 4, 2015) and gained about 1.6% on December 4, 2015. PowerShares DB US Dollar Bullish ETF (NYSEARCA: UUP ) A healing job market and economic improvement are attracting more capital into the country and appreciating the U.S. dollar. UUP is the direct beneficiary of the rising dollar as it offers exposure against a basket of six world currencies – euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. Though further strength in the greenback now looks limited after months of steep ascent, UUP advanced over 0.7% on December 4. iShares MSCI Emerging Markets (NYSEARCA: EEM ) Emerging markets normally fall out of favor in a rising rate environment as investors dump these high-yielding, but risky, investing tools for higher yields at home. However, the emerging market ETF EEM was up about 0.7% on December 4 and lost about 0.1% after hours. EEM has a Zacks ETF Rank #3. Loser SPDR Barclays 1-3 Month T-Bill ETF (NYSEARCA: BIL ) This product offers exposure to the short end of the yield curve by tacking the Barclays 1-3 Month U.S. Treasury Bill Index. Since the Fed hikes the short-term interest rate, yield on the benchmark 6-month Treasury note rose 4 basis points to 0.49% on December 4 and will likely to remain stressed in the coming days. Original Post