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Trade, Fed & Oil Wrote Top ETF Stories of 1H

Mutual Fund Report for TRMCX

The first half of 2018 saw several key events. From Donald Trump announcing a trade war against China to the Fed's policy tightening, to developments in the oil patch or slowing growth of developed economies — each incident left a profound impact on the global investing world and asset classes.

We can see expectations of global economic growth dwindling. iShares MSCI ACWI ETF ACWI is down 3.2% this year (as of Jun 27, 2018). If the downtrend continues, the MSCI All-Country World Index may log “its worst first half of a year since 2010.”

Below we will discuss how the ETF universe responded to events of the first half so that investors have a fair idea of how the funds might behave going into the second half.

Trade Tensions

As part of his protectionist agenda, Trump first slapped steel and aluminum import tariffs against China, Canada, Mexico and the EU in Q1. Also, the Trump administration initiated a national security investigation into auto imports, which along with the metal tariffs put First Trust NASDAQ Global Auto Index Fund CARZ under pressure (read: 5 Sector ETFs Most Exposed to Trade Tensions).

But the main battle has been against China. Both parties will now enact a 25% tariff on each other’s $34 billion worth of goods starting Jul 6. The remaining $16 billion worth of goods will be under public review. But the situation may worsen as the White House plans to enact tariffs on an extra $200 billion worth of Chinese goods, if China keeps retaliating.

Also, Trump plans to deploy a national security review panel to tackle possible threats from Chinese acquisitions of U.S. technology. Needless to say, such a big event left an impact on several areas of the investing world (read: Trump Tariffs Put These Sector ETFs & Stocks in Focus).

Two Fed Rate Hikes

The Fed has enacted two rate hikes this year, one in March and the other in June. The Fed is now planning a total of four rate hikes in 2018, quite contrary to previous projections of a total of three increases this year. The Fed’s inflation expectations have also picked up.

Rising rate worries led the benchmark U.S. Treasury yield to 3.11% in mid-May, the highest so far this year. iShares 20+ Year Treasury Bond ETF TLT lost about 2.7% so far this year (as of Jun 27, 2018). Steep losses were somewhat recouped on rising geopolitical tensions.

ECB’s Looming QE End

As expected, the European Central Bank (ECB) turned moderately hawkish in its latest meeting on Jun 14. While it announced the end of its QE stimulus program by 2018-end, the bank pledged to keep the record low rates unchanged at least till mid-2019. The ECB also hinted at moderation in economic growth and the need to keep the policy rate constant.

Such a dovish finish to its QE program led the Euro to log its worst day against the greenback in two years in mid-June. Plus, the Euro zone economy has been grappling with political uncertainty in Q2.  Overall, Invesco CurrencyShares Euro Currency (FXE) lost 4.6% so far this year (read: Winning & Losing ETFs After ECB's Dovish Exit Plans From QE).

OPEC Output Boost

This year saw an oil rally on OPEC’s output cut decision and reduced supply from Venezuela. United States Oil USO and United States Brent Oil BNO returned 19% to 21%. To put a cap on rising prices and fix the global demand-supply imbalance, OPEC boosted output quota in the June meeting.

OPEC will now return to 100% agreement to the previously agreed output cuts. Per Saudi, the renewed deal will result in a nominal output rise of around 1 million barrels per day (bpd) or 1% of global supply. Since the output boost was smaller-than-expected, oil kept steady after the meeting (read: Winning and Losing Sectors ETFs Post OPEC Decision).

Technology Sector Seesaws

The technology sector witnessed peaks and troughs mainly in 1H. The sector, which started off 2018 on a solid note helped by emerging technologies, tumbled in the March-April period on a host of issues like Facebook’s data breaches, failure of NVIDIA’s self-driving car tests and short selling pressure on Twitter. However, the sector rebounded from May only to slump in late June to confirm its susceptibility to trade conflicts. Technology Select Sector SPDR ETF XLK has added about 6.1% so far this year (as of Jun 27, 2018).

Acute Emerging Market Selloff With China in Bear Market

Equities in developing nations saw acute selloffs, mainly in Q2. The double whammy of Fed policy tightening and trade tensions “put equity gauges worth $8 trillion in a bear market.” Currencies are on the way “toward their worst month since November 2016.” The MSCI Emerging Markets Index tanked to the lowest in 10 months, per Bloomberg. iShares MSCI Emerging Markets ETF EEM is off about 11.% this year (read: $8 Trillion Worth of EM Stocks in a Bear Market: ETFs to Play).

The Shanghai Composite Index plunged 20% in late June from the peak achieved in January, confirming a bear market. iShares China Large-Cap ETFFXI was down 12.9% this year. Countries like Pakistan, Philippines, Turkey and Dubai also saw their equity gauges in bear territory. Brazil too is on its way to join the losing cohort.

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ISHARS-20+YTB (TLT): ETF Research Reports
SPDR-TECH SELS (XLK): ETF Research Reports
ISHARS-EMG MKT (EEM): ETF Research Reports
ISHARS-CHINA LC (FXI): ETF Research Reports
US-OIL FUND LP (USO): ETF Research Reports
CRYSHS-EURO TR (FXE): ETF Research Reports
US BRENT OIL FD (BNO): ETF Research Reports
ISHRS-MSCI ACWI (ACWI): ETF Research Reports
FT-NDQ GL AUTO (CARZ): ETF Research Reports
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