Investors can take a look at exchange traded fund flows to see how markets respond to the developing global trade war.
“Participation through ETFs has trended higher in the last month, aligning with escalation in trade war,” Deutsche Bank’s Chin Okoro and Hallie Martin said in a research note.
Over May, ETFs traded $2 trillion, compared to $1.5 trillion in April, with equity volume accounting for $1.7 trillion or 85% of total ETF volumes. As a percentage of total cash market, ETFs made up an average 29% of the combined tape in May, compared to 25% in April, reflecting an overall increase in ETF trading activity.
“Notably, a few days post the May 5th Trump tweet, ETFs traded in the 32% – 34% range of total market volume, marking the highest share of overall trading for the month of May. We note elevated trading m/m in market segments associated with trade war rhetoric. Most notably, Semis (+95% m/m), China (+32% m/m) and Transport/Aerospace (+24% m/m) saw elevated trading in May. Furthermore, we note elevated shorting activity in China (+2std), Semis. (+1.8std) and Retail (+1.7std) proxy ETFs,” the DB strategists said.
The strategists highlighted the flows into treasury ETFs this week, with SPDR Barclays 1-3 Month T-Bill (NYSEArca: BIL), iShares Short Treasury Bond ETF (NASDAQ: SHV) and iShares 7-10 Year Treasury Bond ETF (NASDAQ: IEF) enjoying the bulk of the flows. Meanwhile, some selling in corporate bond ETFs earlier in the week turned around and allowed iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) and iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG) to bring in decent flows.
On the equities side, it has been two weeks of outflows from Invesco QQQ Trust (NASDAQ: QQQ) while S&P 500 Index ETFs, including the SPDR S&P 500 ETF (NYSEARCA: SPY), iShares Core S&P 500 ETF (NYSEARCA: IVV) and Vanguard 500 Index (NYSEARCA: VOO), have collectively pulled in more than $4 billion in new assets.
Additionally, Utilities were hot mid-week with the Utilities Select Sector SPDR (NYSEArca: XLU) pulling in almost $500 million.
Looking ahead, Deutsche Bank believes trade tensions will remain a focal point for market volatility. DB economists expect trade tension to escalate further in June, highlighting retaliatory actions by China in response to US measures against Huawei. Any signs of placating the tensions would probably only occur after the G20 summit, according to DB.
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