Three ETFs To Watch This Week: GLD, RTH, FXY

by on May 17, 2010 | ETFs Mentioned:

Equity markets are coming off another rocky week, as debt issues in Europe and sinking oil prices highlighted an eventful five day stretch. Markets soared higher to start last week as Europe approved a $1 trillion bailout fund to help highly indebted nations such as Greece cope with deteriorating fiscal situations. However, investors quickly soured on the plan and markets sank sharply to end the week on fears that the bailout would to sharp budget cuts that may throw Europe into a deep recession (see Why The European Bailout Is Just Postponing The Inevitable). As investors tempered their expectations for global growth they sold oil, which fell on the week to end below $72/bbl. Despite broad weakness in commodity markets gold ETFs continued their march higher, finishing ahead by more than 4% on the week. With Europe likely to remain in focus amid numerous data releases and earnings reports, look for the following three ETFs to have an active week:

SPDR Gold Trust (GLD)

Why GLD Could Be On The Move: Gold has been in focus as of late as investors have fled the euro and piled into the safe haven as a way to sidestep the current economic turmoil. This high level of buying has left the precious metal trading at roughly $1230/oz . Investors will be focusing in on gold this week to see if it can maintain momentum as it nears approaches an all-time high. Furthermore, on May 19th the government will release its CPI figures for April; the consensus is that core CPI will be flat while the broad CPI is expected to rise by 0.1%. Should either of these numbers come in above this consensus it could propel GLD and other inflation hedges higher (see Beyond TIP: 10 ETFs To Protect Against Inflation). Meanwhile, if CPI numbers come in at a negative number, it could send gold sharply lower as investors flee the metal amid deflation concerns (see Gold ETF Rides Chaos To New Records).

CurrencyShares Japanese Yen Trust (FXY)

Why FXY Could Be On The Move: With trouble in the euro zone, many investors are looking to Japan as an alternative currency to the struggling euro. However, the yen and Japan have their own problems to deal with; the country is struggling to produce meaningful levels of growth and is in a constant battle against deflation. In a new attempt to overcome this hurdle, the Bank of Japan has indicated it intends to significantly increasing lending to private banks by giving loans at a rate of 0.1%.

While many details are not yet known, the rough plan is for the Bank to offer cheap funding to banks that lend to firms in ‘high growth’ industries such as environmental services, health care and research, according to Reuters. “Banks may be allowed to borrow unlimited amounts of money against collateral, and roll over the loans so they can be used to fund long-term investment,” writes Leika Kihara. “The BOJ may also expand the type of assets it accepts as collateral to prompt banks to lend more to the targeted industries.” Should more details regarding the plan come to light at the central bank’s meeting on the 20th, it could give FXY direction (see Japan’s Currency Woes: Yen ETFs In Focus).

Merrill Lynch Retail HOLDR (RTH)

Why RTH Could Be On The Move: Retail ETFs look to be in focus across the board as three critical retailers report earnings this week; Wal-Mart, Target, and Home Depot are all set to release first quarter figures. RTH looks to be particularly in focus since the fund makes such large allocations to each of the three and places all of them in its top four holdings. Wal-Mart comprises 19.7% of the fund, Home Depot makes up 12.8% and Target has a 8.4% weighting (see RTH’s holdings). Many are expecting retailers to post modest sales increases and give guidance suggesting that consumers are returning to their old spending habits; Thomson Reuters is projecting a 2% on-year rise for quarterly same-store sales. However, despite this optimism, many are expecting Wal-Mart to post declines in same-store sales figures. Should Wal-Mart and the rest of this “big three” be able to squeeze by their earnings estimates it could boost the retail sector and send RTH soaring higher (see Five Facts About HOLDRs Every ETF Investor Must Know).

Last Week’s ETFs To Watch:

IAH: After spiking around $53.25 in trading on Wednesday, IAH slipped back on Thursday afternoon and all of Friday to finish the week marginally lower at $51.14. This modest slide came despite the fact that Cisco Systems, one of the largest components of IAH, posted a 69% jump in earnings. Despite this huge surge, Cisco shares fell back in Thursday and Friday trading, dragging IAH down with it due to the fact that the company lowered its guidance for the fourth quarter (see more information on IAH’s holdings).

FXB: Despite the fact that David Cameron was able to build a coalition government, markets were not swayed to the upside as FXB traded lower by more than 3% on the week. This slump came as investors bet that the Bank of England will keep rates lower for longer and that the Conservative-Liberal Democrat alliance would not be able to agree on the deep budget cuts necessary to bring the British deficit under control. Some are even predicting additional downward pressure from the Bank in the form of quantitative easing, something that could also have contributed to the pound’s losses on the week. “The additional tightening in fiscal policy announced in late June will prompt the Monetary Policy Committee to restart asset purchases at the August MPC meeting,” wrote Alan Clarke, an economist at BNP Paribas SA in London.

OIH: Oil executives were grilled on Capitol Hill in the early part of the week by members of Congress and Obama chipped in with a scathing critique of the oil executives’ comments in the hearings calling their comments a “ridiculous spectacle.” Despite these developments, OIH did not suffer in the early part of the week, remaining relatively flat until Friday morning trading when the fund sank by 2.5% (see charts of OIH).

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Disclosure: No positions at time of writing.