China Rate Increase Holds Back ETFs

December 27th at 8:30am by Tom Lydon

ETFs opened lower on Monday, as investors retreated after China raised key rates over the weekend, stoking worries of slowing global growth. Trading is expected to be light on Monday, as a blizzard snarled traffic and businesses in much of the Northeast. However, stock market exchanges opened on time for a full day of trading.

  • Worries about China’s rate of growth weighed on the market on Monday; the first trading session after China raised its key lending and deposit rates by a quarter-point each on Saturday. Analysts said the move could mean Beijing is now picking up the pace in efforts to slow its rapid growth. The weekend’s interest rate hike was China’s second attempt in three months to slow the pace of its economic growth. Inflation reached two-year highs in November. The  Daily China Bear 3x Shares (NYSEArca: CZI) is up around 4%.
  • European stock markets fell on Monday in thin, volatile trading, with auto stocks driving a sell-off after the weekend rate hike from China. With no corporate or economic news to focus on, European markets followed Asia’s weak lead. Shares such as Volkswagen AG fell more than 5%, while BMW and and Daimler AG fell by at least 4%, dragging the German and overall Stoxx Europe 600 index lower. Volumes remained thin with many traders still away and markets volatile with London out of action – according to MarketWatch. The iShares MSCI Austria Investable ETF (NYSEArca: EWO) is holding its own against the current bearish trend in Europe. [Austria ETF: Exports Bolster Economy.]
  • There is no major economic or corporate news on the calendar for Monday, though analysts believe that retailers could be in focus as heavy snowstorms battered the East Coast, making it difficult for consumers to get out on one of the biggest shopping days of the year. Airlines such as US Airways Group Inc. (NYSE: LLC) and United Continental Holdings (NYSE: UAL) could also be in the spotlight as travel was severely disrupted due to the storms that paralyzed several key airports in the region. A solid transportation play is the iShares Dow Jones Transportation ETF (NYSEArca: IYT). [Transportation ETFs Go On The Move.]
  • Gold prices gave up most of the gains seen in Asian and European trading on Monday, while the dollar remained under slight pressure in holiday-thinned trading. Analysts note that the main news over the long holiday weekend for many came from China, which raised its lending and deposit rates. The dollar index (NYSE: DXY) which measures the greenback against a basket of six major currencies, is down slightly from late Thursday. Investors can play the currency trend with the ProShares Ultra Euro ETF (NYSEArca: ULE).

For full disclosure, Tom Lydon’s clients own shares of IYT.

Gregory A. Clay contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.