It has become increasingly clear that investors are disappointed by the lack of follow-through with the trade war with China, and that it is now having a pronounced effect on the market, combined with a lack of the Fed taking sufficient action. But lately it seems investors are making trade decisions based on the Yuan’s price, resulting in nauseating fluctuations in stocks.
After posting their worst day of the year on Monday, stocks are finally grappled their way back from some of the deterioration on Tuesday, only to get wild swings in price action on Wednesday.
The S&P 500, Dow Jones Industrial Average, and Nasdaq all were up about 1% from the Monday close after a blowout selloff in the overnight session, which took the indices down an addition 1.5% from Monday’s close, but then opened significantly lower, selling off in the morning, only to rally back to the highs, before closing essentially unchanged in the afternoon.
In addition to markets simply being jittery from the precipitous 6 day decline that ended Monday, China’s central bank pegged the yuan’s official reference point at more robust level than the key 7 yuan-to-the-dollar point on Tuesday. The move assuaged the currency markets, which were at first terrified by fears that the U.S.-China trade war was devolving into a currency war. However, the Yuan once again slumped on Wednesday, sending the S&P 500 screaming lower.
Chinese offshore currency hit an intraday low against the dollar early in the trading session. Then, just two minutes later, the S&P 500 plummeted to the low of the day of 2,824.45. Stocks quickly rebounded however, in the afternoon, with the S&P 500 wiping out a 2% loss just when the yuan started to stabilize.
“Going forward, stabilization in the U.S./China trade war is now the most important key to broader market stabilization,” said Tom Essaye, founder of The Sevens Report, in a note. “If the escalation continues, that will cause a further pull-back, regardless of what the [Federal Reserve] is going to do. And, I say that because another 25 or 50 basis points of easing by the Fed won’t materially offset a protracted and escalating trade war.”
Unfortunately, with dramatic volatility comes nauseating price swings, where intraday traders are left searching for answers.
“It’s an extraordinarily frustrating market in that the SPX is swinging several percent in a matter of hours based on no fundamental news,” Adam Crisafulli, a J.P. Morgan managing director, said in a note midday Wednesday.
The good news however, is that for most investors with a longer time horizon, these swings will be of little consequence. Investors looking to use ETFs for a longer term position can still consider something like the Invesco S&P 500 Equal Weight Materials ETF (RTM). And for those investors seeking to avoid stocks entirely, a safe haven ETF like the GraniteShares Gold Trust (BAR) is an option.
Finally, an emerging markets ETF like the Franklin LibertyQ Emerging Markets ETF (FLQE) is something for investors looking to take advantage of foreign market disparities.
US Vs International ETF Plays
For investors looking for continued upside in U.S. equities over international equities, the Direxion FTSE Russell US Over International ETF (NYSEArca: RWUI) offers them the ability to benefit not only from domestic U.S. markets potentially performing well, but from their outperformance compared to international markets.
Conversely, if investors believe that international markets will outperform U.S. domestic markets, the Direxion FTSE International Over US ETF (NYSEArca: RWIU) provides a means to not only see international markets perform well, but a way to capitalize on their outperformance compared to the U.S. markets.
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