Demand For Safe Assets Surged Last Week
James Picerno | Dec 14, 2015 06:43AM ET
The safe-haven trade dominated last week’s market activity. Investment-grade bonds in foreign and US markets delivered the only gains for the five trading days through Dec. 11, based on a set of ETFs representing the major asset classes. Leading the way: foreign corporate bonds, which gained 1.2% last week via the PowerShares International Corp Bond ETF (N:PICB).
The overwhelming trend, however, was negative for most markets. The big loser last week: emerging market equities, which tumbled a hefty 7.0% for five days through Dec. 11.
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Expectations that the Federal Reserve may start to raise interest rates this week are weighing on emerging markets. As the Financial Times notes: “Much of the concern centers on China. Chinese officials and independent economists say a rise in US rates would probably bolster the dollar against the renminbi, leading to capital outflows from China and sucking EM currencies into new phase of turbulence.”
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Meanwhile, the longer-term trend for markets generally is looking weak across the board. Save for investment-grade US bonds, all the major asset classes via ETF proxies are posting losses for the trailing one-year period through Dec. 11. The suffering, however, currently comes in an assortment of negative comparisons.
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The broadly defined commodities group remains the red-ink leader. The iPath Bloomberg Commodity ETN (N:DJP) has fallen by a third for the 12 months as of Friday. The latest bearish signal for the battered commodity arena: the US crude oil benchmark—West Texas Intermediate—fell below $38 a barrel last week for the first time since Dec. 2008.
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Key factors driving the latest downturn in oil: Opec’s decision to focus on holding onto market share rather than cutting production and the warm spell in the northeastern US, which has trimmed demand for heating.
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“The fact that you can almost go swimming in New York City right now is horrible,” says Jay Hatfield, portfolio manager of the InfraCap Active MLP exchange-traded fund. “Absolutely horrible [for heating oil demand]. To me, that’s the straw that is breaking the camel’s back. We’re ground zero for fuel oil demand.”
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