Equity markets had an extremely rocky Tuesday thanks to the Federal Reserve’s August policy meeting; the bank kept rates on hold but announced that it will use the proceeds from its investments in mortgage bonds to buy government debt on a small scale. This report helped to boost stock markets, which all finished the day significantly off of their lows; the S&P 500 and the Dow both lost roughly half a percent while the Nasdaq slumped further to finish the day down 1.2%. The small level of debt purchases had the effect of increasing the demand for the dollar, as many had assumed that the Fed might announce a more robust program to boost the economy. This helped to push down the prices of commodities across the board, with oil falling by 1.6%, copper by 1.3%, and gold dropping below the $1,200/oz. mark in after-hours trading.
The ETFdb 60 Index, a benchmark measuring the performance of asset classes available through ETFs, slid by 5.76 points, or 0.5%. Trading volume was heavy, as the Fed meeting kept investors on edge throughout the day.
One of the biggest losers on the day was the iShares/FTSE Xinhua China 25 Index Fund (FXI), which fell by 2.1%. Today’s sharp drop came as it was reported that import growth into the world’s most populous country slowed considerably in July, leaving many to assume that the country’s programs to curb lending and cool off the economy have been working but also have tempered consumer demand. However, the country also reported that exports rose 38.1% last month and that China’s trade surplus rose to an 18 month high; that left many analysts fearing another round of rhetoric with the West over China’s controversial currency policies. These two reports suggested to many that the country is still heavily dependent on exports and has not been able to develop a robust consumer economy despite the relative economic strength in the country. The “contrast in the trade position of the two most important economies in the world will likely increase the pressure from Washington for Beijing to allow further currency appreciation, particularly in the lead-up to mid-term elections in November,” RBC Capital Markets analyst Brian Jackson said in a note to clients [see holdings of FXI here].
One of the biggest winners in the ETFdb 60 was the iPath S&P 500 VIX Short-Term Futures ETN (VXX), which soared by 1.0% on the day. This modest gain came after the Fed announced that its only measure to stimulate the economy would involve buying government debt with its maturing mortgage backed security portfolio, which amounts to roughly $200 billion. This relatively small amount signaled that the economy is weakening but still remains in an uncertain position going forward. “The step is not anything dramatic. They are trying to send message that we have a recovery struggling to gain momentum and there are some actions they are willing to take to support it,” said Paul Ballew, chief economist at Nationwide [see more charts of VXX here].
Disclosure: No positions at time of writing.