The June FOMC meeting was arguably the most highly anticipated one in quite some time, as investors were dialed in for any talk about tapering of asset purchases in the near future. Many believe that any concrete information on changes to this policy could have a huge impact on not only stocks and bonds, but the broader economic outlook as well.
While most thought that no changes would be made to the pace of asset purchases in this meeting, some were caught off-guard by the slightly rosier outlook by the Fed about the broader economic situation.
In the statement, the FOMC said that ‘economic activity has been expanding at a moderate pace.’ The statement then continued by noting that ‘labor market conditions have shown further improvement in recent months’ although unemployment levels are still high.
Additionally, they did say that the unemployment rate could fall to just 6.5% at some point in 2014, a year sooner than previously projected. This suggests a higher level of optimism, especially when considering that the current rate of unemployment is at 7.6% and actually rose when compared to the previous month (also see Winning ETF Strategies for the Second Half).
Thanks to this outlook, some traders seem to be ratcheting up their expectations for the first reduction in asset purchases, assuming that it might be coming sooner rather than later, although admittedly still a little ways off. Nevertheless, this led to some big moves in a variety of markets in a very short time period, as traders adjust their expectations for this extremely important policy.
In particular, investors saw some volatility in the bond and currency markets, although some equities were in focus as well. Below, we discuss a few ETFs which were among the biggest movers after the Bernanke press conference, and which could continue to be in focus as more is digested about the Committee’s plan for asset purchases in the future:
Treasury Bond ETFs
The talk led to some big losses in the U.S. Treasury market, as speculation over asset purchases caused rates to rise across the board. Ten year notes saw yields surge by about 13 basis points to the 2.33% level, while 30 year securities rose by seven basis points as well.
Arguably the biggest shift in expectations was in the short end of the curve, as the five year benchmark rose 17 basis points to a 1.23% level. Additionally, the two year benchmark soared by five basis points to the 0.32% level, representing a huge jump in percentage terms (see Medium Term Treasury Bond ETF Investing 101).
Thanks to this, there were modest losses in treasury bond ETFs across the board. To give you an idea of the moves across the curve, consider the performances for the following funds:
One Day performance
Another big mover on the press conference was the currency market. The dollar experienced a bout of strength on the shifting perceptions, leading to some huge currency moves.
In particular, the yen was a loser from the Bernanke press conference, as investors sold off this currency in droves. The CurrencyShares Japanese Yen Trust (FXY) lost about 1.1% on the day on solid volume (see Invest Like Mark Cuban with These ETFs).
The meeting was great news for the ProShares UltraShort Yen ETF (YCS) though, as this double inverse product added about 2.6% on the day. This came on solid volume too, and turned out to be a great short-term trade for those in the currency market.
Emerging markets and a variety of global equity funds were crushed after the press conference. Broad emerging market funds like EEM or VWO were down close to 3% on the day, while some individual country funds were sporting losses approaching 5% as well.
A large reason for these losses is the lack of a risk on trade if the Fed is going to be tapering in the near future. Many emerging markets have struggled in the past month or so, and this trend could continue if there are more worries over Fed policies, and a stronger dollar as well.
Real Estate ETFs
In the U.S. market, the worst was seen in the real estate world. REIT ETFs like VNQ, IYR and RWR were seeing losses of between 2.5% and 3.1% on the day, while mREIT ETFs also sunk, continuing the sluggish trend lately for the entire REIT space (see REIT ETFs Crushed: Time to Panic?).
Higher rates have obviously been devastating for this corner of the market, as investors have sought out alternatives that haven’t been as bid up lately. Plus, higher lending rates could eat into returns for a number of companies in the space, dulling the appeal of various types of REIT ETFs.
While the Fed may not have signaled any new policies or a date to begin the tapering, many viewed the press release and the conference as more optimistic about the economy. This had huge implications for a variety of assets, as investors saw a global sell-off and a flight to the dollar.
Given this, investors should definitely be wary about certain asset classes—particularly high yield securities and foreign markets—at this time. And while no new news was really presented—besides a rosier employment forecast—the impact has been pretty severe, suggesting we could definitely see some rocky trading in the months ahead as well.
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Author is long VWO