After floundering for the first part of the week, U.S. equity markets rode strong performances in the tech and basic materials sectors to modest gains for the day. The blue chips in the Dow gained 81 points in the session while the S&P 500 rose by 0.9% and the Nasdaq, spurred on by a strong report from Dell, soared higher by 1.1% in Wednesday trading. Commodities were also broadly higher on the day as gold gained close to 1% and oil rose by 2.9% to finish just below the $100/bbl. level in New York trading. Soft commodities were also strong on the session as corn and wheat both gained more than 4% while industrial metals also jumped higher; copper rose by 10 cents a pound to finish just below the $4.10 mark. These gains in the commodity markets came largely thanks to speculation that emerging market demand would increase in the near future, and happened despite a flat dollar. “The stock market and other commodity markets seem to be reflecting that risk is back on today,” said Yang Jun, an analyst at Hongyuan Futures Co. “However, recent economic data may limit price gains.”
One of the biggest winners on the day was the iShares FTSE China 25 Index Fund (FXI) which gained 2.3% in Wednesday trading. Today’s gains were largely due to a reversal in sentiment in emerging markets investing. Traders are once again embracing this asset class as fears over inflation are subsiding and many are looking to this sector in order to provide outsized returns to portfolios once again. “Emerging markets inflows are likely to remain robust as portfolio investors continue to be attracted by wide interest-rate spreads, appreciating local currencies and reduced sovereign risk profiles,” said Matt Lasov, practice leader of Frontier Strategy Group’s Quantitative Analytics. Thanks to this, FXI is now about flat over the last week of trading and has gained 5.6% in the past quarter alone, suggesting that after the sell-off earlier in the year investors are now once again feeling comfortable about investing in these rapidly growing, but risky nations, helping to boost FXI in the process [see holdings of FXI here].
One of the biggest losers in the ETF world was the iPath S&P 500 VIX Short-Term Futures ETN (VXX) which sank by 2.7% on the day. Today’s losses came as traders once again embraced risk in the markets, buying up equities and commodities across the board. The minutes from the latest Federal Reserve meeting also helped to boost sentiment as it appears as though the Fed is very divided on inflation expectations for the future. Some believe that an exit to the stimulative measures may come sooner rather than later while others believe that it will ‘unnecessarily damp the ongoing economic recovery’. Due to this internal battle, it appears as if the status quo is likely to exist for the foreseeable future, news that is probably good news for stocks and commodities. As a result, demand for this ETN which represents a purchase of the ‘fear index’ was limited on the day as VXX experienced above average volume on the selling [see more on VXX's fact sheet].
Disclosure: No positions at time of writing.