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FXF Hedge To Assuage ‘Brexit’ Fears

By Max Chen and Todd Lydon Market observers are growing anxious as the United Kingdom contemplates breaking away from the European Union. However, traders may hedge the so-called Brexit risk through the Swiss franc and currency-related exchange traded fund, according to industry analyst ETF Trends . The CurrencyShares Swiss Franc Trust (NYSEArca: FXF ) , which tracks the currency movement of the Swiss franc against the U.S. dollar, has been a traditional safe-haven play in times of volatility. FXF has gained 1.3% year-to-date as global volatility pressured riskier assets. On the backdrop of greater uncertainty down the road, HSBC argues that the Swiss currency could strongly rally on the a Brexit but would not weaken if the U.K. decided to remain in the 28-country bloc, reports Katy Barnato for CNBC . The U.K. is set to hold a referendum on June 23 where the electorate will vote on whether the country should remain with the European Union. “The CHF would likely rally on Brexit, given the political and European-centric nature of the crisis ,” HSBC currency strategists, David Bloom, Daragh Maher and Mark McDonald, said in a report. “The Swiss National Bank may intervene, but we believe it would only, at best, be able to slow the move rather than reverse it.” The HSBC strategists argue that while Brexit fears have been gaining momentum, there has been little evidence that the franc has priced in Brexit risks. “This asymmetry makes the CHF the best choice as a hedge,” HSBC Strategists added. Unlike the U.K., Switzerland has never been a part of the European Union. During times of duress among Eurozone members, the Swiss franc has acted as a safe-haven hedge. For instance, during the height of the Eurozone financial crisis, the franc currency rallied against the euro. The U.S. dollar weakened against the franc currency Wednesday, trading around CHF0.9765 Wednesday. The Swiss franc appreciated against the USD Wednesday after the Federal Reserve held interest rates steady while lowering expectation for the number of hikes this year to two from a planned four rate hike. CurrencyShares Swiss Franc Trust Click to enlarge Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Market Lab Report – Premarket Pulse 3/17/16

Major averages rose on higher volume with the S&P 500 closing above its 200-day moving average. The Federal Reserve on Wednesday indicated it only expects two interest rate increases in 2016 instead of four. In a statement, the central bank said “global economic and financial developments continue to pose risks” to the U.S. The Fed trimmed its estimate of GDP growth in 2016 to 2.2% from 2.4%. And inflation as measured by headline PCE is now expected to rise to 1.2% by year end, down from a prior 1.6% call. The vote was 9 to 1, with Kansas City Fed President Esther George dissenting. She wanted a quarter-point increase in rates. This reduction in anticipated rate hikes gives the Fed room to further reduce the number later this year to no rate hikes, or they may even introduce negative rates, should the global economy remain stagnant. Of course, central banks are failing to see that such actions are not helping, or more likely, they are buying time by propping up the price of hard assets and equities as they have done since 2009. GLD and Silver Wheaton (SLW) had continuation pocket pivots as the Fed’s dovish response weakened the dollar thus strengthened gold and silver. Eroding confidence also contributed to the rising price of gold. A pronounced divergence exists between Dow Jones Utilities and major indices such as the S&P 500 between 12/4/15 when Dow Utilities started on its uptrend while the S&P 500 trended lower. The major indices eventually bounced but Utilities continued higher as well. Indeed, a number of utility stocks have been hitting our screens. So while this uptrend has been mostly a junk-off-the-bottom and defensive name led rally, it is somewhat similar to the QE-manipulated rallies we had in 2009. Thus, central banks which sit with a considerable amount of power, especially when in alignment, can push markets much higher than anyone expects, despite the worsening fundamental backdrop. Futures are lower this morning as the tug-of-war between easy money and slowing global growth continues. Semiconductor Maxlinear (MXL) had a pocket pivot breakout. It can be bought on a constructive pullback closer to its 10-day moving average. Earnings and sales are skyrocketing, pretax margin 23.8%, ROE 38.9%, group rank 29.

The Best And Worst Of February: Nontraditional Bond Funds

Nontraditional bond funds lost an average of 0.47% in February, bringing the category’s one-year returns through the end of the month to -4.06% versus 1.50% for the Barclays U.S. Aggregate Bond Index. As a result, investors pulled a total of $21.7 billion out of the category for the year ending February 29, bringing total category assets down to $125 billion. Despite this, there have been some stellar performers in the category: Six funds generated one-year returns in excess of +2%, but this represented just a small fraction of the 129 funds in the category with track records of at least a year. Meanwhile, 84 funds in the category suffered one-year losses of at least 2%, with 13 of those posting double-digit losses. Best Performers in February The three best-performing nontraditional bond funds in February were: The BTS Tactical Fixed Income Fund was the only mutual fund in February’s top three, edging out a pair of ETFs to rank as the month’s top performer. BTFAX returned +3.30% in the shortest month of the year, bringing its one-year returns to +1.37% for the year ending February 29. This was good enough for it to rank in the top 6% of its category, which may be why the fund received more than $84.7 million in inflows for the year. The fund’s one-year beta of 1.49 is high, but with its bullish returns, investors don’t seem to mind. ETFs from ProShares and Deutsche X-trackers took the second and third spots for February, returning +1.89% and +1.51%, respectively. Only the former has been around long enough to have a one-year track record, and it returned +0.86% for the year ending February 29, ranking in the top 1% of all nontraditional bond ETFs. It suffered $3.95 million in net outflows for the year, though, compared to the Deutsche fund, which received $6.25 million in inflows. Worst Performers in February The three worst-performing nontraditional bond funds in February were: Highland’s Opportunistic Credit Fund was February’s worst-performing nontraditional bond fund, and it was very near the bottom of the category for its one-year returns. HNRZX lost 4.86% in February, bringing its one-year losses through February 29 to a painful 32.16%. The fund’s beta of -1.02 indicates nearly perfect inverse correlation to the Barclays US Aggregate Bond Index, but its -36.09% one-year alpha better explains its woeful returns. Over the three-year period, the fund lost an annualized 7.70%, ranking at the very bottom of the category. Thus, it’s more than a little surprising that it enjoyed more than $5.9 million in inflows for the one-year period ending February 29. PIMCO’s Capital Securities and Financials Fund only launched on April 13, 2015. It lost 3.83% for the month. Coming in as the third-worst performing nontraditional bond fund is the Putnam Premier Income Fund, which returned -3.68%. Its one-year return through February 29 stood at -10.04%. Past performance does not necessarily predict future results. Jason Seagraves contributed to this article. Note: MPT statistics (alpha and beta) are calculated relative to the Barclays U.S. Aggregate Bond Index.