The second week of May was a pretty poor one for American equity markets as high levels of volatility combined with fears over global growth and inflation to send markets to a loss for the week. Commodities were very mixed on the week’s news as some products– such as those in the energy sector and some of the softs– managed to rise marginally higher on the week while others— notably the precious metals and the grains– continued to struggle. Elsewhere, the focus in Europe continued to be on the common currency and its long term viability across increasingly divergent markets. Worries over the Greek debt crisis continued to plague the euro sending the currency further lower against the dollar last week. While these concerns undoubtedly impacted the market, arguably the biggest focus of the week was inflation and its impact on some of the world’s largest economies. In China the country’s year-over-year increase in CPI came in at 5.3% while growth in new loans came in well above 700 billion yuan in April, stoking fears that further reserve ratio hikes would be imminent in the world’s most populous nation. Meanwhile, the U.S. saw April’s CPI figure accelerate slightly to a 3.2% year-over-year change, well above March’s reading and increasing worries that more must be done to prevent inflation from hitting the American economy as well.
This week, investors face a few earnings reports some some of the country’s biggest retail names as well as a smattering of smaller companies which may not be able to move broad markets, but will undoubtedly move sectors. Additionally, investors should focus on the large number of key data points which are due out this week in a variety of markets including important news from Europe, Canada, the U.S. and Japan. Meanwhile, commodity markets are likely to continue to receive a great deal of attention as their recent spat of volatility could continue into this week as well, especially given a number of key reports that should shed some light on inflation rates in some of the world’s most important markets, particularly Europe. With this backdrop, we highlight three ETFs that could be in for an active week:
Merrill Lynch Retail HOLDR (RTH)
Why RTH Will Be In Focus: A number of important retail firms, which dominate RTH’s top holdings, all report earnings this week, guaranteeing it will be a tumultuous week for the fund and the sector at large as well. Among the top companies that are giving their quarterly updates this week are Wal-Mart, rival Target, and home improvement store Home Depot. Thanks to its impressive size as well as its role as a barometer of spending for discount consumer spending, Wal-Mart’s report looks to be especially in focus, possibly giving the markets clues as to how spending is rebounding– if at all– across the country. WMT is forecast to show profits of 95 cents a share, up from 87 cents a share in the year ago period while showing a modest increase in overall revenues; from $99.8 billion in the year ago period to $102.8 during the most recent period. Should the retail giant deliver on the figures, and if some of the smaller retail firms are able to post similarly positive numbers, it could be a good week for RTH and help soothe fears that the higher gas prices have been eating into consumer spending at least in the near term [see Holdings of RTH here].
iShares Barclays 20 Year Treasury Bond Fund (TLT)
Why TLT Will Be In Focus: This week looks to be an extremely important one for the U.S. dollar and bond markets in general as the American government is expected to hit the debt ceiling after the latest round of notes are sold to the public. While the U.S. can still skirt an outright default for a few months thanks to some accounting tricks and other bookkeeping maneuvers, many are growing increasingly pessimistic that the U.S. will raise the debt ceiling in time, potentially setting off a brand new financial crisis. “Using the debt limit as a bargaining chip is quite risky,” Fed Chairman Ben Bernanke told a Senate Banking Committee hearing on the implementation of the Dodd-Frank financial regulatory overhaul law approved a year ago in an effort to avoid a repeat of the crisis. “The worse outcome would be one in which the financial system was again destabilized as we saw following Lehman.” Due to these fears, investors should look for TLT, a fund that tracks long-dated Treasury bonds, to be in focus for much of the week since long-dated products are generally more sensitive to changes in default or interest rate risk than their short-term brethren. As a result, it could be a volatile and important week for TLT and investors should proceed with caution in this fund until the U.S. eventually raises the debt ceiling and quells any talk of outright default [see Treasury ETFs Filing In The Duration Spectrum].
Global X Oil Equities ETF (XOIL)
Why XOIL Will Be In Focus: Oil prices have been extremely volatile as of late; crude oil futures are down almost 7.7% over the past month but they came storming back last week, gaining 2.2% for the five day period. Thanks to this uncertainty, investors looking to play oil with equities should pay particular attention to XOIL, a relatively new fund from Global X. This ETF, which tracks an index of companies that are highly correlated to the price of oil, looks to be particularly impacted by any changes in the price of crude and if the past month is any indication, XOIL could be in for some severe highs and lows over the next few trading days. In fact, XOIL has lost over 11% in the past two weeks alone suggesting that either these highly correlated securities are in a severe downtrend or that they have finally bottomed out, making for an excellent buying opportunity. While no one knows for sure, the events of the next few trading days should help to shed some light on the clouded situation plaguing this increasingly volatile market [see Three Forgotten ETFs To Play Oil].
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Disclosure: No positions at time of writing.