Putting all April rate hike speculations, spurred by hawkish comments from some Fed officials, to rest, Fed Chair Janet Yellen has stressed on global market concerns, and the consequent need for taking a ‘cautious’ stance on future rate hikes.
With this, the Fed Chair reaffirmed its statements from the March meeting where it reduced its forecasts for rate hikes in 2016 from four to just two. However, citing positive developments in the U.S. economy in recent times, Atlanta Fed president Dennis Lockhart, San Francisco Fed president John Williams and Richmond Fed president Jeffrey Lacker indicated the possibility of a faster policy tightening this year.
As per these officials, the reduced rate hike projection mainly reflected the tantrums thrown by the global financial market, which are now showing signs of cooling off. The two important indicators to measure the timing of another rate hike – labor market and inflation – are both stabilizing. The San Francisco Fed president even said that he would promote a hike as early as April.
While these remarks ignited the chances of a rate hike in April, the U.S. economy brought reflected some weaker data points. U.S. consumer spending grew slightly in February, raising questions about the economic growth momentum.
The latest comments of Yellen apparently went against the trending beliefs in the market. As a result, equities reacted nicely taking cues from this sweet surprise. Among the top ETFs, investors saw (SPY) add over 0.9%, (DIA) up over 0.5% and (QQQ) move higher by 1.6% on March 29, 2016.
Some subtle moves in various markets and asset classes were also noticed. U.S. sovereign bond prices recorded gains. On March 29, yields on 10-year Treasury notes dropped 8 bps to 1.81% in a single day while yields on two-year Treasury notes fell 11 bps to 0.78%. Below we discuss a few ETFs which popped and dropped after Yellen’s speech and could remain in focus ahead.
PowerShares DB US Dollar Bullish Fund (UUP)
The U.S. dollar lost following dovish Fed comments. This U.S. dollar ETF UUP was down about 0.9% on March 29.
iPath S&P 500 VIX ST Futures ETN (VXX)
As the optimism took the broader market in its grip, volatility-based exchange-traded products underperformed on March 29. As result, VXX, a popular ETN providing exposure to volatility, lost about 5.8% on the very day.
WisdomTree Emerging Currency Strategy ETF (CEW)
As the Fed hike talks took a backseat and the greenback fell, emerging market currencies emerged stronger. Notably, ‘A Bloomberg index tracking emerging currencies rallied in March by the most since 2009’. A strengthening commodity market, during the timeframe, helped this commodity-rich block. As a result, CEW added over 0.2% on March 29, 2016 (read: These Commodity Currency ETFs Outpacing Dollar to Start 2016).
SPDR Gold Shares (GLD)
Gold prices, which lost steam on a rising greenback a few days back, witnessed a rally due to a sudden change in market sentiments. The ETF tracking the gold bullion – GLD – added about 1.9% on March 29, 2016 (read: Gold is Shining: Go Long With These ETFs).
Real Estate Select Sector SPDR (XLRE)
As the Fed indicated a cautious approach ahead, the drive for income once again came to prominence. While many dividend ETFs benefitted from this trend, several sector ETFs with high potential and high dividend also turned out to be major beneficiaries.
XLRE – which focuses on real-state companies – hit an all-time high on March 29. XLRE added about 2.2% on March 29. It yields 2.06% annually (as of the same date) (read: Inside the New REIT Select Sector SPDR ETF).
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