U.S. equity markets surged higher to open Monday trading as traders bought up shares across the board on hopes of a French and German pledge to shore up the European banking system by early November. The Dow finished the day ahead by nearly 3% while the broader indexes posted even more impressive gains as the S&P 500 added 3.4% and the Nasdaq surged by 3.5%. Commodity markets also jumped as gold gained about 2.6% and oil rose by 3.4% to finish the day just below the $86/bbl. mark. These strong performances in the headline commodities were matched by some of the lesser known products as well, as the softs and industrial metals added mutli-percentage points gains in Monday trading.
Meanwhile, currency trading saw the U.S. dollar weaken significantly against many of its major counterparts as a bullish tone helped to lift the euro against the greenback on the day. In fact, the euro added nearly 2.6 cents against the greenback while the pound also gained about 1.1 cents as well. However, the losses didn’t stop there for the dollar, as the American currency also suffered large losses against the Canadian and Australian dollars as well. Unsurprisingly, given the broad ‘risk on’ trade, investors dumped Treasury bonds across the board, pushing the two year note to a yield of 0.3% and the ten year to a 2.07% yield.
One of the biggest ETF winners on the day was the iShares FTSE China 25 Index Fund (FXI) which gained 5.3% in Monday trading. Today’s gains came as a unit of China’s massive sovereign wealth fund began to buy more shares in some of the country’s biggest banks. Although the purchases were small, it represented one of the most overt signs yet that the Chinese government was looking to prop up domestic stock prices in any way possible. The move also represents the first additional share purchase since the financial crisis by the unit and the first acknowledged step in nearly three years from Beijing that steps were being taken to prop up the markets. As a result of this government intervention, investors scooped up shares in FXI to start the week, helping to turn the fund around from its recent negative stretch [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 plunged by 7.2% in Monday trading. These heavy losses were largely a result of a plan from Sarkozy and Merkel which seemed to suggest to many that a plan to recapitalize banks would be out by early November. This helped to give many investors some degree of relief over the situation, especially considering the recent downgrades of giants Spain and Italy. “There had been a reluctance to address bank recapitalization, which the market views as critical. This is recognition of the issue and a line drawn in the sand, which is viewed as progress,” said Russ Koesterich, chief investment strategist at iShares. Thanks to this perceived reduction in risk, investors felt that there was limited demand for VXX to start the week, helping to push shares of this popular fund lower on surprisingly light volume [see charts of VXX here].
Disclosure: No positions at time of writing.