Tag Archives: Mario Draghi

HEDJ

European ETF Strategy Unraveling

(Bloomberg) — A European stock trade that deployed the use of ETF products as a means of hedging currency exposure is one that enamored global investors throughout 2015 and drew more money than practically anything else in equities is blowing up in people’s faces.

As the moves in the the WisdomTree Europe Hedged Equity Fund (NYSE:HEDJ) show, the strategy of going long the region’s shares while hedging to mute the euro’s swings is unraveling. The exchange- traded fund has plunged a record 14 percent in December, erasing annual gains that swelled to as much as 23 percent in April and were still above 18 percent in July. Hit by withdrawals, its market value has fallen to $17 billion from more than $22 billion as recently as August.

Investors are pulling money from the fund like never before after Mario Draghi’s increase in European Central Bank stimulus failed to live up to expectations, triggering a decline in the region’s stocks and a strengthening of its currency.

“A lot of investors have been protecting themselves against a weaker euro, aiming for European equity returns which have been very strong this year as long as you hedged the euro,” said Ewout van Schaick, head of multi-asset portfolios at NN Investment Partners in The Hague. His firm oversees 180 billion euros ($198 billion). “That story seems to be over after the recent central bank actions. Investors are positive on European equities but are less sure it has to be on a hedged basis.”

The fund’s popularity grew earlier this year, when its hedge became of paramount importance as the ECB started its bond-buying program, triggering a weakening of the euro to levels not seen since 2003 and a 22 percent surge in the region’s stocks. In the first four months of the year, traders poured $13 billion in the ETF, making it the favorite vehicle to bet on European equities.

NYSE FEZ
Euro Stoxx 50 Index NYSE:FEZ

FEZ Fizzles. Fast forward to December, and things don’t look as good. The Euro Stoxx 50 Index, whose ETF tracker is NYSE:FEZ is down 7.1 percent through yesterday’s close, heading for its worst ending to a year since 2002, while the euro is set for its biggest monthly advance since April against the dollar.

Forecasters don’t see the currency moving much from now. It’ll weaken to $1.05 and stay at that level for the first three quarters of next year, before starting to rebound, according to projections. It’s hovered around $1.09 for most of December.

That doesn’t mean the consensus is turning bearish on European equities. Even without a significant weakening of the currency, strategists expect euro-area equities to climb another 12 percent by the end of next year, aided by a recovering economy, ECB stimulus and low valuations. The Euro Stoxx 50 rose 1.2 percent at 11:47 a.m. in London. At 14.2 times estimated earnings, companies on the gauge are cheaper than those on the Standard & Poor’s 500 Index or MSCI All-Country World Index.

“We still believe in European equities,” Van Schaick said. “The European economic recovery is in the earlier stage, so all the lights are green for Europe. They’re going to do a lot better than U.S. equities next year.”

Euro Exposure? Eurozone Bond ETFs In Advance of ECB’s QE

MarketsMuse.com update courtesy of extract from Jan 6 ETF.com article by Dennis Hudacheck, with a look at Eurobond ETFs $HEDJ,$DBEU, $HEZU, $EZU, $DBEZ, $VGK, $FEZ, $DFE

All eyes are on the European Central Bank’s Jan. 22, 2015 meeting, as it’s no secret that ECB President Mario Draghi has been hinting at a large-scale quantitative easing program for some time.

There’s no guarantee the ECB will actually implement any such program in January, but the consensus seems to be that there will be some type of big announcement on that front sometime in the first quarter of 2015.

At the same time, the U.S. Federal Reserve is expected to begin raising rates in mid-2015. This opposing force between the world’s two largest central banks has strategists calling for a currency-hedged strategy to capitalize on a rising-equity/falling-euro scenario in Europe.

An Equity ETF Designed For A Weakening Euro For currency-hedged options, the $5.6 billion WisdomTree Europe Hedged Equity Fund (HEDJ | B-47) is by far the leading ETF in the space.

Despite its “Europe” name, HEDJ focuses exclusively on eurozone securities. That means that for better or worse, it excludes the U.K., Switzerland and Sweden, which account for roughly 50 percent of Europe’s equity market capitalization, combined.

More importantly, it carries a significant exporter bias, attempting to capitalize on a weakening-euro scenario. The dividend-weighted ETF does this by screening out any company that gets more than 50 percent of its revenues from within Europe.

This makes HEDJ geared toward investors with a strong bearish view on the euro. Naturally, the fund favors consumer sectors over financials compared with vanilla, cap-weighted European indexes (MSCI Europe IMI Index).

This now-blockbuster fund tracks its index well and trades more than $80 million a day at 3 basis point spreads, keeping overall trading costs very low.

‘Neutral’ Currency-Hedged Products Contrary to popular thinking, investors interested in currency-hedged Europe ETFs don’t necessarily have to be bearish on the euro. They might have a neutral view, and simply prefer a purer equity exposure by taking any currency fluctuations out of the equation.The Deutsche X-trackers MSCI Europe Hedged Equity ETF (DBEU | B-66) is also a leading ETF in the space, and takes a broader approach, including all of developed Europe, beyond the eurozone.

It tracks a cap-weighted index and neutralizes exposure to the euro, the British pound, the Swiss franc and a few other European currencies against the dollar. DBEU has more than $710 million in assets and trades with robust liquidity that’s sufficient for small and large investors alike.

For a neutral currency take on the eurozone, rising in popularity is the iShares Currency Hedged MSCI EMU ETF (HEZU), which literally holds the $7.5 billion iShares MSCI EMU ETF (EZU | A-63) with a forward contract overlay to neutralize euro exposure.

For the entire analysis from ETF.com, please click here

Professional Traders Lining Up to Sell SPX For the Wrong Reasons: Be Wary of the Good Idea Fairy: A Rareview View

Below commentary is courtesy of extract from a.m. edition of today’s Rareview Macro’s “Sight Beyond Sight”

A Simple View:  US Dollar, Gold, SPX, UST’s

Neil Azous, Rareview Macro LLC
Neil Azous, Rareview Macro LLC

The objectives we have laid out continue to materialize across the themes we are focused on.

The Q&A session with President Mario Draghi following today’s European Central Bank (ECB) meeting has concluded. We will leave it to the people with PHDs to debate the intricacies of what he had to say. But if price is the voting machine that always tells you the truth, then the weakness in the Euro exchange rate highlights that the press conference was simply dovish. Expect these same PHD’s to keep chasing as they lower their price targets again.

As evidenced in our most recent editions of Sight Beyond Sight, there was little doubt that Draghi would not strike a dovish tone. With his emphasis on a unanimous vote for further action if necessary and formally adding in the notion that the ECB’s balance sheet will return to 2012 levels (i.e. ~1 trillion higher), Draghi did a good job of walking back the negative tone that the media have tried to portray over the last 48-hours, especially the speculation about an internal battle/dissent/revolt building up against Draghi.

For us, it was never about whether the professionals sold the Euro after the event. They were going to do that anyway as the trading dynamics continue to point towards the Euro buckling under its own weight regardless of what Draghi says. Instead, we were more focused on a short covering event not materializing ahead of tomorrow’s US employment data and that has been largely removed for today.

So those bearish have to contend with the following factors: Continue reading

Trading Professionals Disgusted By Today’s Data: A Rareview Macro Musing

Below extract from this a.m. edition of Rareview Macro’s Sight Beyond Sight…

“….The key objective we laid out at the end of April has, we are pleased to say, now materialized – don’t sell in May and go away,  as the S&P 500 will trade higher to a range of 1920-1950. What is needed now for our forecasts to be fulfilled completely is a trend change in the US Dollar and greater evidence that the CAPEX profile will accelerate.

On the margin this morning’s US employment data did two things:

Neil Azous, Rareview Macro LLC
Neil Azous, Rareview Macro LLC

1. It mitigated some degree of the concern at the Federal Reserve about the slack in the labor market.

2. It strengthened the intermediate-term argument that a trend change in the Euro-Dollar (EUR/USD) is underway following the actions announced by Mario Draghi at the European Central Bank (ECB) yesterday.
Many with a short-term mindset are focused on price levels or technicals that force people to adjust risk. The Euro exchange rate above 1.37 or Gold above 1258, are two obvious examples.

What we would highlight is that neither today’s data nor yesterday’s actions by the ECB portend to a correction in risk assets. This is primarily because both events do not strengthen the bear argument that the weak data in the first quarter has bled hard into the second quarter growth profile.

To access the entire newsletter, please visit Rareview Macro’s Sight Beyond Sight