Last week institutional equity volume swelled mid-week, before tapering off during Friday’s session, and the SPX finished below its 50 day moving average (Friday close of 1335.02) after rising above this level earlier in the week.
Headlines out of Europe continue to be “market movers,” and it was refreshing to see volumes return to the markets for the first time notably since the Memorial Day holiday several weeks back. Despite the wide trading range in the SPX last week, having an ultimate high of 1363.46 and low of 1324.41 intra-week, the VIX (CBOE Volatility Index) staggered lower for the most part, and has been trading below its 50 day moving average now for the past five sessions.
Most market followers would be surprised we think to see an SPX with a 1325-1335 handle corresponding with a VIX below $20, given the fact that we saw a VIX with a $24-$27 handle several weeks prior, amid the same ongoing unrest in Europe. This said, a waning VIX, as well as longer term Treasury Bonds failing to rally substantially given Thursday’s steep equity sell-off, seems to be providing clues that institutional participants may finally be “comfortable” going into the remainder of the summer in terms of where they sit via equity allocations and hedges that may or may not be in place.
One observation that is not terribly surprising given the level of assets that flooded out of these funds in recent weeks throughout most of May and much of June, is that Emerging Markets based ETFs caught a bid all last week and net creation activity was evident.
For example, VWO (Vanguard Emerging Markets) reeled in more than $600 million on the week, and was the overall leader in net creation activity last week among all ETFs, and peer EEM (iShares MSCI Emerging Markets) was also among net creation leaders, reeling in nearly $300 million in new assets.
Throughout January and February of this year, we highlighted in these weekly recaps, large institutional accumulation in the billions of dollars taking place, only to see a great deal of these assets spill out of these two ETFs during the steep May sell-off in equities. Being of a “higher beta” nature than say the S&P 500, these EM funds that are highly concentrated to China, Brazil, India, and Russia for example, are largely utilized by managers that seek non-domestic equity exposure, and are likely looking for out-sized returns and are willing to take more risk than say an investment in fixed income, or even U.S. domestic equities for example. XLF (SPDR Financials), was among net inflows leaders as well, as the fund took in $500 million.
U.S. Financials, like Emerging Markets, are also considered higher beta equity exposure, and the sector ETF has rallied back reasonably well in the past month in a “post JP Morgan trading disaster” scenario, with XLF rising 1.92% versus the SPX up 0.87% during the same time frame. Year to date, the Financials remain a relative strength leader, up 10.23% with the SPX up 6.30%. However, although we witnessed these type of inflows last week, we note that the actual notional amount of dollars “created” in both Financials and EM funds last week, was not a huge, substantial number, as we have seen net flows on a week to week basis that sum in the $1 to $10 billion range in some cases.