U.S. equity markets continued their September surge as all the main indexes posted solid gains in Monday trading. While the Dow finished ahead by just 0.8% and the S&P jumped up 1.1%, the real story was the 1.9% gain in the Nasdaq, which surged on continued optimism over Asian growth. Precious metal markets remained relatively flat–with gold only gaining fifty cents–while industrial commodities saw more robust gains as oil surged by a little under 1%. Despite the strength in equity markets, U.S. Treasury Bill yields fell, helping to reverse their recent upward trend and keep the Ten Year note below the 2.8% mark.
Today’s sharp gains came after clarity finally arrived in the banking sector. The new “Basel Rules” will give banks plenty of time to shore up their capital reserves, easing fears that new rules would hurt the banking sector and decrease loan portfolios in the immediate future. “Traders seem relieved that the [Basel III] regulatory agreement for banks does not require banks to raise huge amounts of equity capital immediately to meet the new balance-sheet guidelines, but gives them several years to hit the targets,” wrote Fred Dickson, chief investment strategist at Davidson Cos. In fact, some portions of the plan do not have to met until the end of the decade, leading some to argue that dividends will soon be on the rise at many U.S. banks [for more on these new rules make sure to read our story on how this accord impacted financial ETFs].
The ETFdb 60 Index, a benchmark measuring the performance of asset classes available through ETFs, jumped 10.35 points, or 1.0%. Winners outnumbered losers by more than seven-to-one, with volume slightly higher than slow trading days last week.
One of the biggest gainers on the day was the iShares FTSE/Xinhua China 25 Index Fund (FXI), which jumped higher by 2.8%. In addition to the Basel agreement, FXI was boosted by news of stronger-than-expected year-over-year rise in industrial production, retail sales and moderate inflation levels. All of these data points left investors feeling more confident in the strength of a Chinese recovery and of the ability for the world’s most populous nation to continue to grow its economy at a solid rate. “More and more people who’ve looked at the August data released over the weekend are starting to come to the conclusion that this is in fact a soft landing and it’s been reasonably well orchestrated by the government,” said Andy Rothman, China strategist at CLSA Asia-Pacific Markets in Hong Kong [see holdings of FXI here].
One of the biggest losers in the ETFdb 60 was the iPath S&P 500 VIX Short-Term Futures ETN (VXX), which plummeted by more than 5% on the day.VXX, which tends to thrive in times of market turmoil and fear, was crushed by the certainty that the Basel agreement brought to the market; the S&P 500 started the day sharply higher and continued the trading session within a 10 point range, much to the dismay of traders who had bought the volatility ETN. Today’s losses continue the rough streak for VXX which has now seen its shares fall by 26.1% over the past month and close to 50% so far in 2010 [see more fundamentals of VXX here].
Disclosure: No positions at time of writing.