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The first half of 2016 will be long-membered in the global financial history only because of the final few days of its last month – the days which saw Britain’s decision to decouple itself from the European Union (EU) by a referendum on June 23.
The event was of such huge scale that the world saw the worst single-day sell-off on June 24, outdoing the previous record losses seen in September 2008 when Lehman Brothers filed for bankruptcy. Thanks to Brexit, global risky assets including equities bled for the next two days.
While 1H16 saw a horrible final month, the start was also tumultuous. Hard landing fears in the world’s second largest economy China and surprisingly low oil prices due to the liftoff of the Western Sanctions against Iran that ensures more supplies in the global market amid falling demand hit risk-on investments hard but brightened safe haven assets and income-producing securities.
Among the top ETFs, investors saw SPY gain about 1.4%, DIA add over 1.5% and QQQ move lower by about 5% in the year-to-date frame (as of June 29, 2016). Let’s peek into the ETF headlines of 1H16 and find out the major events that led to such market movements.
Brexit Spooks Investors
On June 23, 51.9% Britons voted in favor of leaving the EU, leaving the ‘remain' camp behind by just 3.8 percentage points. With this, last Friday turned out to be a black day for the investing world as it led to a bloodbath in the global market (read: Pound ETF Plunges: More Sell-Off in the Cards?).
No Fed Hike This Year to Date
The Fed stayed put throughout the first half of 2016, keeping the rates unchanged thanks to global growth worries and moderation in U.S. growth. Though possibilities of a June hike shot up after most of the U.S. economic readings came in stronger to start Q2, shockingly low job growth put all likelihood out of whack.
Now, with Brexit-induced panic pulling the strings of the global market developments, the Fed is less likely to act in the coming months. Fed chief Yellen acknowledged “repercussions” from Brexit and is thus expected to take a cautious stance ahead on the policy tightening front.
Though the Fed maintained its plans for two rate hikes this year, the present scenario will hardly allow for one. The Fed also lowered the number of potential hikes in each of 2017 and 2018 from four to three. The Fed funds rate for the long run was slashed to 3% from 3.3%. Most importantly, U.S. dollar ETF (UUP - Free Report) ran out of steam, shedding about 3.4% this year (as of June 29, 2016) on a moderation in the U.S. growth (read: Rising ETFs in a Falling Dollar Environment).
Expectations of longer-than-expected lower rates have given a boost to the rate-sensitive sectors such as utilities and real estate as well as to high-yield securities. In fact, many utility and dividend ETFs like Vanguard Utilities ETF (VPU),Utilities Select Sector SPDR (XLU) and PowerShares S&P 500 High Dividend Portfolio (SPHD) are on investors’ radar.
Reduced U.S. Growth Projection
The Fed went on to reduce its 2016 GDP estimate to 2% from 2.2%. This is the second time this year that the Fed has slashed the U.S. GDP estimate for 2016 from 2.4% projected in December.
This opened the window for mid-cap ETF investing, which bridges the gap between large and small-cap investing. While large-caps are risky now on shake European economies, slower U.S. economic growth does not fully favor small-cap investing. Probably this is why ProShares S&P Mid-Cap 400 Dividend Aristocrat (REGL - Free Report) has added over 13% in the year-to-date frame (as of June 29, 2016) (read: Mid-Cap ETFs to Take Lead Ahead?).
Yen Flies High Despite Negative Interest Rates by BoJ
In late January, Bank of Japan (BoJ) followed the suit of the European Central Bank (ECB) by pushing interest rates to the negative territory for the first time. The move was aimed at boosting growth and eliminating deflationary threats. Despite this, higher safe-haven demand lifted yen, benefiting CurrencyShares Japanese Yen ETF (FXY - Free Report) (up about 16.6% as of June 29) and punishing Japanese equities mirrored by the 4.3% loss that iShares MSCI Japan (EWJ - Free Report) suffered.
Golden Phase for Gold
After three years of losses, 1H16 brought unparalleled gains for gold ETFs. The metal was on a tear on dovish central banks across the developed economies and safe haven demand. SPDR Gold Shares (GLD - Free Report) is up over 24% so far this year (as of June 29, 2016).
In fact, the overall mining sector gave an all-star performance in 1H. And since mining ETFs generally act as leveraged plays on the underlying metals, Global X Gold Explorers ETF (GLDX) and PureFunds ISE Junior Silver ETF (SILJ) are among those that were on a tear in 1H16.
Lure for Income Stays Strong
Quite expectedly, demand for relatively safe and high-yielding products were in demand in 1H. The plunge in Treasury yields and the flare-up in volatility made investors cautious as they flocked to regular income-producing securities. As a result, along with dividend ETFs, fixed-income ETFs likeiShares 20+ Year Treasury Bond ETF (TLT - Free Report) and even an emerging market product like PowerShares Emerging Markets Sovereign Debt Portfolio ETF (PCY - Free Report) drew investors’ attention.
$50 Oil: Finally a Reality
May saw the long-awaited recovery in oil prices. The liquid commodity which has been on a strong footing lately, rising from its 12-year lows in February, staged a sharp rally in recent times. Easing concerns over supply glut on lower shale output, a significant fall in U.S. crude inventory, geo-political crisis in some oil producing nations like Nigeria and Venezuela and the wildfire in Canada’s oil rich area made this rally possible.
United States Oil Fund (USO) and United States Brent Oil Fund (BNO) are the two beneficiaries of this rally. Most of the market watchers look forward to a brighter second half for the oil patch with a more favorable demand-supply balance awaiting next year (read: Best Oil Rally in 7 Years; 3 Energy ETF Winners).
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Top ETF Stories of the First Half of 2016
The first half of 2016 will be long-membered in the global financial history only because of the final few days of its last month – the days which saw Britain’s decision to decouple itself from the European Union (EU) by a referendum on June 23.
The event was of such huge scale that the world saw the worst single-day sell-off on June 24, outdoing the previous record losses seen in September 2008 when Lehman Brothers filed for bankruptcy. Thanks to Brexit, global risky assets including equities bled for the next two days.
While 1H16 saw a horrible final month, the start was also tumultuous. Hard landing fears in the world’s second largest economy China and surprisingly low oil prices due to the liftoff of the Western Sanctions against Iran that ensures more supplies in the global market amid falling demand hit risk-on investments hard but brightened safe haven assets and income-producing securities.
Among the top ETFs, investors saw SPY gain about 1.4%, DIA add over 1.5% and QQQ move lower by about 5% in the year-to-date frame (as of June 29, 2016). Let’s peek into the ETF headlines of 1H16 and find out the major events that led to such market movements.
Brexit Spooks Investors
On June 23, 51.9% Britons voted in favor of leaving the EU, leaving the ‘remain' camp behind by just 3.8 percentage points. With this, last Friday turned out to be a black day for the investing world as it led to a bloodbath in the global market (read: Pound ETF Plunges: More Sell-Off in the Cards?).
No Fed Hike This Year to Date
The Fed stayed put throughout the first half of 2016, keeping the rates unchanged thanks to global growth worries and moderation in U.S. growth. Though possibilities of a June hike shot up after most of the U.S. economic readings came in stronger to start Q2, shockingly low job growth put all likelihood out of whack.
Now, with Brexit-induced panic pulling the strings of the global market developments, the Fed is less likely to act in the coming months. Fed chief Yellen acknowledged “repercussions” from Brexit and is thus expected to take a cautious stance ahead on the policy tightening front.
Though the Fed maintained its plans for two rate hikes this year, the present scenario will hardly allow for one. The Fed also lowered the number of potential hikes in each of 2017 and 2018 from four to three. The Fed funds rate for the long run was slashed to 3% from 3.3%. Most importantly, U.S. dollar ETF (UUP - Free Report) ran out of steam, shedding about 3.4% this year (as of June 29, 2016) on a moderation in the U.S. growth (read: Rising ETFs in a Falling Dollar Environment).
Expectations of longer-than-expected lower rates have given a boost to the rate-sensitive sectors such as utilities and real estate as well as to high-yield securities. In fact, many utility and dividend ETFs like Vanguard Utilities ETF (VPU),Utilities Select Sector SPDR (XLU) and PowerShares S&P 500 High Dividend Portfolio (SPHD) are on investors’ radar.
Reduced U.S. Growth Projection
The Fed went on to reduce its 2016 GDP estimate to 2% from 2.2%. This is the second time this year that the Fed has slashed the U.S. GDP estimate for 2016 from 2.4% projected in December.
This opened the window for mid-cap ETF investing, which bridges the gap between large and small-cap investing. While large-caps are risky now on shake European economies, slower U.S. economic growth does not fully favor small-cap investing. Probably this is why ProShares S&P Mid-Cap 400 Dividend Aristocrat (REGL - Free Report) has added over 13% in the year-to-date frame (as of June 29, 2016) (read: Mid-Cap ETFs to Take Lead Ahead?).
Yen Flies High Despite Negative Interest Rates by BoJ
In late January, Bank of Japan (BoJ) followed the suit of the European Central Bank (ECB) by pushing interest rates to the negative territory for the first time. The move was aimed at boosting growth and eliminating deflationary threats. Despite this, higher safe-haven demand lifted yen, benefiting CurrencyShares Japanese Yen ETF (FXY - Free Report) (up about 16.6% as of June 29) and punishing Japanese equities mirrored by the 4.3% loss that iShares MSCI Japan (EWJ - Free Report) suffered.
Golden Phase for Gold
After three years of losses, 1H16 brought unparalleled gains for gold ETFs. The metal was on a tear on dovish central banks across the developed economies and safe haven demand. SPDR Gold Shares (GLD - Free Report) is up over 24% so far this year (as of June 29, 2016).
In fact, the overall mining sector gave an all-star performance in 1H. And since mining ETFs generally act as leveraged plays on the underlying metals, Global X Gold Explorers ETF (GLDX) and PureFunds ISE Junior Silver ETF (SILJ) are among those that were on a tear in 1H16.
Lure for Income Stays Strong
Quite expectedly, demand for relatively safe and high-yielding products were in demand in 1H. The plunge in Treasury yields and the flare-up in volatility made investors cautious as they flocked to regular income-producing securities. As a result, along with dividend ETFs, fixed-income ETFs likeiShares 20+ Year Treasury Bond ETF (TLT - Free Report) and even an emerging market product like PowerShares Emerging Markets Sovereign Debt Portfolio ETF (PCY - Free Report) drew investors’ attention.
$50 Oil: Finally a Reality
May saw the long-awaited recovery in oil prices. The liquid commodity which has been on a strong footing lately, rising from its 12-year lows in February, staged a sharp rally in recent times. Easing concerns over supply glut on lower shale output, a significant fall in U.S. crude inventory, geo-political crisis in some oil producing nations like Nigeria and Venezuela and the wildfire in Canada’s oil rich area made this rally possible.
United States Oil Fund (USO) and United States Brent Oil Fund (BNO) are the two beneficiaries of this rally. Most of the market watchers look forward to a brighter second half for the oil patch with a more favorable demand-supply balance awaiting next year (read: Best Oil Rally in 7 Years; 3 Energy ETF Winners).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>