ETF Plays Ahead Of The G-20 Finance Meeting

by on September 2, 2009 | ETFs Mentioned:

On September 4th and 5th the finance ministers and central bank governors of the 19 most powerful countries (along with the finance minister and central bank governor of the European Union) will meet in London to discuss preliminary ideas for preventing another financial crisis and steps for removing the trillions of stimulus dollars from the market without causing serious repercussions. While it is unlikely that any major surprises will come out of the summit, the conference may give the markets some direction before the crucial heads of state meeting in Pittsburgh later this month. Three types of ETFs are likely to be in focus following this weekend’s conference; financials, currency, and commodity ETFs.

Financial ETFs: Possible Volatility

Some recent proposals have been extremely populist in nature, such as the current proposal in Great Britain to tax currency transactions at .005% and give the proceeds to third world countries. While extreme proposals such as this have little chance of ever being enacted, it is virtually guaranteed that some changes will come to the financial system this year.

Germany and France have proposed a more mainstream program to target bank excesses and limit bonuses, and would like to see a joint EU position on the issue heading into Pittsburgh. Should a united front calling for reforms emerge from the summit, financial ETFs such as IPF, DRF, IXG, all of which have a more international slant, could be negatively impacted. More likely, however, is a lack of consensus on the issue.

Currency ETFs: Rising or Falling Dollar?

Levels of debt continue to pile on here in the U.S., and a sinking dollar is driving up the prices of international goods for many Americans. Don’t be surprised if some rhetoric aimed at stabilizing the dollar (at least temporarily) comes out of the summit, allowing exporting nations to continue to ship cheap goods to the U.S. However, should we see a further power shift towards emerging markets look for their currencies to be more positively affected than the original industrialized nations. China has been clamoring for a greater share of the IMF votes and it may begin to assert itself more on the world stage.

China, along with other emerging countries, has also been engaging in efforts to supplant the dollar as the world’s reserve currency and move towards a basket of currencies like the ones found in DBV. Should China find allies in this endeavor, look for a further hit to the dollar and the European currencies that would stand to lose the most from this shift of clout. Such a scenario would make UDN an excellent play.

Commodity ETFs Demand Direction

Another category that is likely to be affected by the summit is commodity ETFs. Commodity prices were hammered during the economic slowdown, but have staged a furious rally in recent months. If the Chinese ministers anticipate renewed strength in their economy, expect a gain for diversified commodity ETFs such as RJI and those that invest in base metals like copper (such as JJC). However, if concerns about continued weakness, particularly in the manufacturing sector, dominate the summit, commodity prices could be kept in check in the near term.

While it is impossible to know what will happen this weekend, these aforementioned types of  ETFs could be in for a very interesting month. With the economic recovery suddenly showing signs of frailty, the pressure is on the leaders of the developed world to push forward and avoid a double dip. Both this weekend’s meeting in London and the G-20 heads of state meeting in Pittsburgh later this month could prove to be rather eventful.

Disclosure: No positions at time of writing.