IB Traders Insight

IB Traders' Insight

Global market commentary from IBG traders and market participants.

Click here for important disclosures

1 2 3 4 5 2 593
2015-05-01 17:06:21

Posted by
Kevin Kastner
Washington Deputy Bureau Chief for Economic Data Operations
MNI News
Contributor
Macro

MNI US Data Watch

The highlight of the May 4 week will be Friday’s employment report, which is expected to show a 235,000 rise for April after the tepid 126,000 increase in the previous month. There is a clear tendency to underestimate April payrolls based on past results. But note that there have been downward revisions for the past two months, deviating from the trend of the past year. Earlier in the week, there will be data on factory orders, international trade, nonmanufacturing conditions, productivity, and consumer credit. Outside of data, the Treasury will hold its quarterly refunding on Wednesday.

Here is a closer look at the key data in the coming week:

NONFARM PAYROLLS FOR APRIL, FRIDAY, MAY 8, AT 8:30 A.M. ET

Nonfarm payrolls are forecast to rise by 235,000 in April after a much smaller than expected reading in March. Some analysts point to the energy sector as a continue drag on the overall figure. The unemployment rate is expected to fall to 5.4% after holding steady at 5.5% in the previous month. Hourly earnings are forecast to rise 0.2%, while the average workweek is expected to hold steady at 34.5 hours.

Over the last 10 years of forecasts for April payrolls, there were only three overestimates and seven underestimates, the reverse of the previous month. There has only been one overestimate in April since 2008. The absolute average miss of 61,600 over that 10-year period was larger than the 47,900 average over the same 10-year period for March payrolls. Given the larger size and number of underestimates over the period, and the fact that the March 2015 gain was sharply overestimated, there is a risk of an underestimate for April. 

The soft 126,000 payrolls gain in March was the first overestimate after four straight underestimates, and was made worse by a net downward revision to the previous two months. After a string of generally upward revisions over the past year, there have been downward revisions to each of the last two months. 

FACTORY ORDERS FOR MARCH, MONDAY, MAY 4 AT 10:00 A.M. ET

Factory orders are expected to rise 2.3% in March, as durable goods orders were already reported up 4.0% and nondurable goods orders are expected to post a modest gain in the month.

INTERNATIONAL TRADE FOR MARCH, TUESDAY, MAY 5, AT 8:30 A.M. ET

The international trade gap is expected to widen to $43.0 billion in March after narrowing sharply in February. Analysts expected a large increase in imports and a smaller gain in exports. Boeing reported a slight rise in aircraft deliveries to foreign buyers while manufacturing industrial production was up 0.1%, but down 0.1% excluding motor vehicles, suggesting that exports were soft. At the same time, import prices down 0.3% overall and down 0.4% excluding a rise in the price of imported petroleum products. 

NONMANUFACTURING ISM FOR APRIL, TUESDAY, MAY 5 AT 10:00 A.M. ET

The ISM non-manufacturing index is expected to stay at 56.5 in April after small decrease in March. Regional services conditions data pointed to a slowdown in activity, while the flash Markit Services index declined in the month. 

PRELIMINARY PRODUCTIVITY FOR FIRST QUARTER, WEDNESDAY, MAY 6, AT 8:30 A.M. ET

Nonfarm productivity is expected to fall 1.7% in the first quarter following a 2.2% decline in the previous quarter. Output growth is expected to be much slower than in the previous quarter, based on the GDP data. Unit labor costs are expected to jump 4.6% in the first quarter following a 4.1% rise in the previous quarter.

WEEKLY JOBLESS CLAIMS FOR MAY 2 WEEK, THURSDAY, MAY 7 AT 8:30 A.M. ET

The level of initial jobless claims is expected to rebound by 17,000 to 279,000 in the May 2 week after a surprise 34,000 decline in the previous week to a 15-year low. The four-week moving average fell by 1,250 to 283,750 in the April 25 week and could post another decline in the May 2 week. The April 4 week’s 282,000 level will roll off the four-week average calculation as the current week's is added, which would result in a very modest decline in the moving average if the MNI forecast is realized, all else being equal. 

Seasonal adjustment factors expect unadjusted claims to post a sharp decline in the May 2 week after an unexpected 28,982 drop in the previous week. As a result, if there is some payback for the surprise drop in the previous week, adjusted claims should rebound. In the comparable week a year ago, unadjusted claim fell by 29,379, a larger decline than expected, so unadjusted claims fell by 14,000 that week. 

CONSUMER CREDIT FOR MARCH, THURSDAY, MAY 7, AT 3:00 P.M. ET

Consumer credit usage is forecast to rise $15.5 billion in March, the same gain as in February. Retail sales rose 0.9%, while sales were up 0.4% excluding motor vehicles and were up 0.5% also excluding gasoline station sales. Nonrevolving credit use should be again the core of the overall increase. 

 

MNI is a wholly owned subsidiary of Deutsche Börse Group.

This article is from Market News International (MNI) and is being posted with MNI’s permission. The views expressed in this article are solely those of the author and/or MNI and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-01 14:25:14

Posted by
Steven Levine
Fixed Income Reporter
MNI News
Contributor
Fixed Income

MNI's U.S. Risk-O-Meter

Sales of new investment-grade corporate bonds outpaced estimates this past week, as some issuers were lured by still ultra-low U.S. interest rates to sell large-sized debt offerings for shareholder friendly purposes. Issuance was underscored by Oracle Corporation's $10.0 billion, six-part bond, with overall credit quality concentrated in ‘A’-rated deals. Other multi-part offerings included Amgen, Inc.’s $3.5 billion of  bonds in four parts, CNOOC Finance’s $2.8 billion, ‘AA’-rated, three-part notes and PepsiCo, Inc.’s $2.5 billion of single-’A’ rated, four-part debt. Also, U.S.-based issuers far outweighed non-domestic borrowers as firms exited from earnings season blackouts. Average deal size fell to $872.5 million from $1.38 billion week-over-week, and the supply level fell by more than half.

 

Keep pace with the latest corporate news with MNI's US Risk-O-Meter, a weekly recap of credit risk appetite!
For more information and a full version of the US Risk-O-Meter, email Steven Levine at slevine@mni-news.com. Click here for more about MNI.

 

This article is from Market News International (MNI) and is being posted with MNI’s permission. The views expressed in this article are solely those of the author and/or MNI and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-01 13:43:22

Posted by
Barron's

Contributor
Options

Pepsi Offers Limited Risk; Stock Can Deliver a Pop

The valuation is attractive, and the upside from a potential breakup is not reflected in call option prices.

 

Diet Pepsi soda may not be good for you, but the company’s stock could boost your portfolio’s health.

Susquehanna Financial Group is telling clients to buy upside calls on PepsiCo (ticker: PEP), following a decision to change Diet Pepsi’s formula.

In August, Pepsi will replace aspartame, a controversial artificial sweetener, with sucralose in Diet Pepsi, Caffeine Free Diet Pepsi and Wild Cherry Diet Pepsi. Susquehanna says the decision pressures Coca-Cola’s (KO) Diet Coke to consider changing its formula.

Chris Jacobson, a Susquehanna Financial derivatives strategist, is telling clients to buy Pepsi’s January $95 call. With the stock at $94.49, the calls cost $4.

The calls are priced with a 14.5% implied volatility that is near the low-end of the past two years. Of all stocks in the Standard & Poor’s 500 index, Pepsi’s 180-day implied volatility is lower than all but six stocks, Jacobson says. This means the options market is pricing Pepsi’s stock as likely to move less than 1% each day until January expiration.

Pablo Zuanic, who covers Pepsi for Susquehanna, is advising clients that the company’s low- to mid-single digit earnings-per-share growth, and 2.5% dividend yield, means the company is neither a growth nor income story.

“We see Pepsi mainly as an optionality play as the valuation leaves little downside and the upside from a break-up is not reflected in the share price as per our math,” Zuanic recently told clients.

Of course, it is impossible to know if Pepsi will break itself up into smaller pieces. All that is certain is that the January $95 call’s break-even price is $99. Below $99, money spent on the call would be lost. Should the stock trade to $105, which could happen if analysts try to make Pepsi’s story sound sexier than it is, the January $95 call would be worth $10. Pepsi’s 52-week high of $100.76 was reached in February.

Bottom line: The January $95 call is an inexpensive option on Pepsi’s optionality.

 

Get investing analysis that moves stocks and markets—Subscribe to Barron’s for just $1 a week.

This article is from Barron’s and is being posted with Barron’s permission. The views expressed in this article are solely those of the author and/or Barron’s and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


 

2015-05-01 12:49:34

Posted by
Andrew Wilkinson
Chief Market Analyst
Interactive Brokers
Contributor
Macro

Manufacturing employment gauge shrinks

The April ISM pulse showed little change in the composite health of the manufacturing sector, yet at the same time, it failed to shift up a gear as was expected. The Bloomberg consensus called for a gain in the diffusion index to 52.0, but in the event the index remained unchanged at 51.5. However, the composition changed for the better, with indices for production, new orders and trade improving. Both export and import orders expanded, with the export index jumping back into the expansion zone. Inventories contracted as manufacturers apparently met new demand with stockpiles, allowing the so-called ‘recession indicator’ (new order less inventories) breathing space. Last month, this gauge was bordering on the suggestion of recession. I would say that the basic improvement in key components signals respite from the earlier impact of a strengthening dollar. The exception to the better tone to the report lies with the employment gauge, which slipped from standstill level to one of contraction at 48.3. This is the weakest reading since September 2009 and only the third time since the US left its recession days behind that the measure pointed to a shrinkage in the manufacturing labor force. Should the signal worry the Fed? Probably not. While in November 2012 the employment index slipped to 48.6, the headline ISM reading fell to 48.9 but quickly rebounded. Two years ago in May 2013 the employment gauge fell to 49.5 but was accompanied by a headline manufacturing index of 51.5. The latest disappointment from the employment index is accompanied by signs of a pick-up in demand, which is likely to offer comfort to policymakers.   

Chart – Rarely does the employment index point to contraction

 

2015-05-01 12:01:40

Posted by
Russ Koesterich, CFA
BlackRock
Contributor
Macro

Would More Government Debt Help the U.S. Economy?

Russ explains why he's skeptical that massive, debt-fueled government stimulus is what's needed to accelerate the U.S. recovery.

 

Following another disappointing first quarter for the U.S. economy, many economic policy experts are once again asking: “What, if anything, can be done to accelerate the United States’ persistently soft recovery?”

One dimension of this debate is whether the U.S. government should be doing more to stir up demand, even if this means taking on more debt. Given the United States’ already sizeable existing obligations, I’m skeptical that another debt binge is in the interest of the country or the economy. Here are four reasons for my skepticism of massive, debt-fueled government stimulus.

1. There’s a lack of clear evidence it will work.

Historically, there has been no correlation between government borrowing and gross domestic product (GDP) growth. In other words, debt-fueled government spending hasn’t been associated with faster growth. To my mind, the onus is on those arguing for more debt to draw a clear path between further borrowing and economic growth.

2. An aging population is already challenging government finances.

An older population will challenge the U.S. economy in a number of ways. Slower work force growth will make it harder for the United States to achieve its historical growth rate. In addition, an older population will put increasing pressure on government entitlement programs, which were designed at a time of shorter lifespans and retirements.

3. There is already too much U.S. government debt.

Gross U.S. federal debt is at around 100% of GDP, a level historically associated with slower growth. And this gross debt doesn’t include unfunded liabilities related to the country’s pension and medical programs.

4. America has too much debt in general.

Tales of the United States “deleveraging” aren’t completely accurate. U.S. household balance sheets certainly are in much better shape than they were pre-crisis, and the financial sector is less levered. That said, overall non-financial debt in the United States has increased from $32 trillion on the eve of the financial crisis to more than $41 trillion today. Even after adjusting for the growth in the economy, the best you can say is that U.S. debt has stabilized. The ratio of non-financial debt-to-GDP is nearly 235%. While this is down a bit from the 2009 peak of 240%, debt is still disturbingly high from a historical perspective. The 60-year average is just 160% and even as recently as 10 years ago, non-financial debt was only 200% of GDP.

None of the above suggests that there isn’t an opportunity for well-targeted government spending. Infrastructure spending, for instance, could help improve U.S. productivity and long-term growth. But focused public-private partnerships to address the country’s aging infrastructure shouldn’t be synonymous with another massive stimulus program.

My view is that the U.S. economy is in the midst of a recovery, and growth should re-accelerate in the second quarter, or at least in the second half. That said, I would agree with those who argue that the recovery isn’t likely to take us back to the glory days of 3.5% to 4% annual growth. A massive build-up in debt is unlikely to change this, and it would probably make things worse.

Source: Bloomberg, BlackRock research

 

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog and you can find more of his posts here.

 

This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

©2015 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.

iS-15466

 

This article is from BlackRock and is being posted with BlackRock’s permission. The views expressed in this article are solely those of the author and/or BlackRock and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-01 11:13:02

Posted by
Andrew Wilkinson
Chief Market Analyst
Interactive Brokers
Contributor
Options

LinkedIn slides after earnings

Option volume on business and professional social media company LinkedIn (Ticker: LNKD) is running at four-times its typical average daily pace after an earnings flop shaved 28% off its market cap overnight. Its shares were trading at $251.00 on Thursday, but a revenue shortfall and downbeat outlook has investors in a panic. The chart below breaks out call and put open interest by strike and expiry. I have added vertical dashed lines to mark Thursday’s close and Friday’s price. In the upper panel displaying call posturing, you’ll see how many “abandoned” positions there are as a result of the steep slide for LinkedIn’s shares. By contrast there appear to be a variety of winners from the fall. It looks like there was a decent amount of positioning in the May 1 expiry positioned for an earnings disappointment. Meanwhile, there also appear to be many “told-you-so” bears, skeptical of the “it’s different this time” mania embracing social media stocks. Those bears appear to be sitting handsomely on January 2016 put positions at the $175.00, $150.00 and even $120.00 strikes where open interest as of Thursday was in excess of 1,000 contracts at each strike.

Chart – January 2016 put open interest

2015-05-01 10:57:27

Posted by
John Carter
President
Simpler Stocks
Contributor
Stocks

Simpler Stocks: Thursday Movers

The Dow slipped into negative territory for the year on Thursday and stocks declined overall on the day.  The key was investor reaction to earnings, particularly in the tech-heavy NASDAQ, which was off more than 1.6%. Social media stocks led the way south. Apple was one of the big factors weighing down equities amid a WSJ report that the Apple Watch rollout has been hobbled in part by a hardware glitch.

TASER International Inc. (Ticker: TASR)

Despite controversy, stun guns remain in demand among law enforcement agencies. TASR’s $0.13 a share in net income creamed the Street’s estimate of $0.06 a share. The $44 million in total top line beat consensus by 12% and was up 24% year-over-year. The weapons segment did most of the heavy lifting.  With shares up 7% on the day, multiples are stretched a bit, though increasing gross and operating margins may fill the gap a bit on growing earnings.

Oracle Corp. (Ticker: ORCL)

Oracle may or may not be truly gunning for CRM, but bid data and cloud remain trends the company will exploit. The free cash flow yield is 6%, which should give the company plenty of firepower to keep gunning for new technology and takeouts. Mid-teens forward multiple is palatable.

Cigna Corp. (Ticker: CI)

Contrary to health care peer Humana (Ticker: HUM), CI said Thursday that it had not seen much change in the medical use by members. Better premiums and fees in the latest quarter helped the company beat results, with a 12% gain year-over-year. The company boosted its EPS range to $8.15 to $8.50 a share from a previous $8.00 to $8.40 a share. Revenues were up 11% year-over-year, with operating income better than expected. 

Neustar Inc. (Ticker: NSR)

Earnings of $1.08 a share topped the Street by six cents. The company, which provides tech clearinghouse services, saw $251 million in revenues, topping the Street by $5 million. The forward guidance of $4.25 to $4.50 a share in net income is well above the $4.29 a share estimate at the midpoint. The company has logged better than 30% growth in the security segment. The forward PE is 9x even with the recent share price rally. 

Virgin America Inc. (Ticker: VA)

Though shares in Virgin America were down 5%, the airline posted better than expected results. The net income of $0.24 a share, adjusted, compared favorably with the Street at $0.14 a share. The revenues of $326 million edged past $322 analyst projections. The capacity levels are projected to drop, which should help results a bit going forward.  P/S still below 1x.

American Electric Power (Ticker: AEP)

Defensive plays may be attractive in a bumpy economy. Of course, dividend yields are attractive too, and AEP yields 3.8%. EPS was up 11% year-on-year and the company got an upgrade last week by Deutsche Bank, from hold to buy. Beta is 0.4x.

 

About the author: John Carter has been a full time trader for 15 years, serving over 100,000 subscribers in over 100 countries.  For more analysis on high growth stocks visit www.SimplerStocks.com.

 

This article is from Simpler Stocks and is being posted with Simpler Stocks’ permission. The views expressed in this article are solely those of the author and/or Simpler Stocks and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-05-01 09:27:25

Posted by
Andrew Wilkinson
Chief Market Analyst
Interactive Brokers
Contributor
Forex

Euro specs get burnt

It has been some week for the euro with its worth jumping by more than 4-cents against the dollar to $1.1275. The Financial Times carries a neat reflection of morphing risk appetite on its front page on Friday, depicting a too far, too soon rally for stocks as investors grow fatigued of ECB stimulus plans. But profit-taking for stocks is only half the story. Ever since May 13, 2014, speculators in the currency futures market have maintained a net short position against the single currency. At the time the euro bought $1.3704 and probably very few investors could conceive of the potential for a trek to parity within the space of 12-months. Yet just six weeks ago the euro currency came within 5-cents of doing just that. And week after week since sentiment turned sour, an increasing number of sellers targeted further declines in the unit. By the end of March, the CFTC reported a record number of shorts wagering against the euro at 227,000 contracts. Through April 21 when the CFTC last printed its latest tally, the number of shorts stood at 215,000 lots when the euro bought $1.0736. Since then the euro currency has fared its biggest rally since speculators started getting short. Friday’s report, due at around 3:30ET will contain data through April 28 at which time the currency had leapt to $1.1173.  

Chart – Net speculative positioning in euro currency futures

There are two major potential catalysts for a further squeeze in the value of the euro currency. First, judging by the CME’s latest open interest data, overall positioning has not been reduced tremendously. The massive number of shorts is still in the system and likely to be panic-stricken by both the nature and ferocity of the ongoing rally. Second, at the time of the latest position report, the yield on the 10-year German bund was just 0.08%. On Friday German bunds continue to suffer as investors reassess the prospects for how long QE will likely endure. The bund yield has subsequently leapt to 0.38% and has moved far quicker this week than the rise in comparable treasuries. Such events have really detracted from the dollar’s nascent bull market and burnt speculators in the euro along the way.

2015-04-30 15:36:13

Posted by
Neil Azous
Founder & Managing Member
Rareview Macro LLC
Contributor
Macro

US Carry Trade (SPX + UST 10-yr) vs. the Japanese Yen

Our view is that the move higher in Bund yields is now real. Our first target is just above 0.39%, the level it was at when QE started on March 9th. That will be when the fire hoses show up and it is time to re-establish US dollar strategies again.

Why is the 0.39% level in the German Bund relevant? Because Italian and Spanish government bond yields bottomed on March 9th.

We appreciate that you are seeing all sorts of analysis out there about the trend shocks across asset classes and style selections but please allow us to simplify things for you.

The three drivers of global macro investing during 2012-2015 have been and still are:  US Carry Trade (SPX + UST 10-yr), Japanese Yen, and US dollar.

The additional driver of global macro investing during 2015 is:  EU Carry Trade (DAX + German 10-yr BUND).

Nothing else matters. It really is that simple.

The chart below shows the US Carry Trade (SPX + UST 10-yr) versus the Japanese Yen and normalized to 100. As you can see, the total return in percentage terms on a weekly chart going back three years is virtually identical (i.e. +48%).

 

Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

 

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

2015-04-30 15:13:46

Posted by
Russ Koesterich, CFA
Heidi Richardson, CPM
BlackRock
Contributor
Stocks

What a Strong Dollar Means for Investing

It’s a good time to be an American tourist. Chances are that with the stronger greenback in your pocket it’s going to cost a lot less than last year’s overseas vacation. But there is a flipside.

Even if you’re not planning any big trips but are interested in the market, you will probably feel the costs of a stronger dollar—especially if overseas interests are part of your well-diversified portfolio. A strong dollar has significant implications for investors for both the domestic and international portions of their portfolios.

If you are a U.S.-based investor, the strong dollar has an impact on the earnings of many large U.S. corporations that depend on exports for revenue. We’ve already seen many such firms reduce their earnings expectations throughout the early months of 2015.(1)

Combined with the fact that valuations for the U.S. are already fairly pricey, investors this year have begun favoring non-U.S. developed equities, which have outperformed the U.S. year to date.(2) But U.S. investors who take this route face the possibility that the exchange rate will reduce returns.

That’s because investing in international securities can be thought of this way:

Return = Return in Local Currency +/- Effect of Change in the Exchange Rate

In other words, the total return for U.S. investors buying non-U.S. securities depends on both asset returns and currency movements.

The impact of currency on returns has been significant with the strengthening of the dollar. Indeed, recent experience demonstrates how exchange rates can be highly volatile, sometimes more so than the underlying asset as measured in its domestic currency. For example, the MSCI European Monetary Union Index weakened nearly 10% in U.S. dollar terms in 2014, but a position hedged against the dollar gained close to 5%. That represents nearly a 15% differential due to currency erosion.

Currency fluctuations add to returns when a local currency appreciates against the dollar (e.g. the euro/USD from 1.12 to 1.22). Conversely, currency fluctuations detract from returns when a local currency depreciates against the investor’s home currency (e.g. the USD/Yen from 80 to 100).

For that reason, the recent dollar appreciation has led to demand for financial vehicles that attempt to help investors mitigate, or in some cases even profit from the effects of shifting foreign exchange rates on their portfolios, including currency-hedged exchange traded funds (ETFs). In the last two years, investment in currency-hedged ETFs by investors around the world has grown to $59 billion, and the number of these funds available globally doubled to 194.(3)

Currency hedging involves either exchanging foreign currency for U.S. dollars or entering into a short-term financial contract (typically futures) that neutralizes the impact of exchange rate fluctuations. Investors who fully hedge their currency exposures shouldn’t suffer when a foreign currency depreciates relative to the dollar because the depreciation will be offset by gains on the dollar hedge.

Given our outlook for the dollar, and our belief that central bank divergence—which is one of the factors behind the rise of the dollar—will continue to shape markets in 2015, currency hedging may make sense for investors looking overseas for opportunities.

 

Heidi Richardson is a Global Investment Strategist at BlackRock, working with Chief Investment Strategist Russ Koesterich. She is also the lead investment strategist for iThinking. You can find more of her posts here, and a link back to the original article here.

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog and you can find more of his posts here.

 

Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets or in concentrations of single countries. The Fund's use of derivatives may reduce the Fund's returns and/or increase volatility and subject the Fund to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. The Fund could suffer losses related to its derivative positions because of a possible lack of liquidity in the secondary market and as a result of unanticipated market movements, which losses are potentially unlimited. There can be no assurance that the Fund's hedging transactions will be effective.

This material represents an assessment of the market environment as of the date indicated and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any security in particular.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

© 2015 BlackRock. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners.

 

(1) Strong Dollar Squeezes U.S. Firms, Wall Street Journal, Jan. 27, 2015

(2) Source: As of 4/13/15 MSCI Developed Equities returned 4.38%, Japan Topix 13.62% compared with S&P500 which returned 2.21%, according to Thomson Reuters Datastream, BlackRock Investment Institute..

(3) Source: iShares Global Business Intelligence, February 16, 2015.

003934-IS-PRD_v06BM_04/15

 

This article is from BlackRock and is being posted with BlackRock’s permission. The views expressed in this article are solely those of the author and/or BlackRock and IB is not endorsing or recommending any investment or trading discussed in the article. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

1 2 3 4 5 2 593


Disclosures

We appreciate your feedback. If you have any questions or comments about IB Traders' Insight please contact ibti@ibkr.com.

The material (including articles and commentary) provided on IB Traders' Insight is offered for informational purposes only. The posted material is NOT a recommendation by Interactive Brokers (IB) that you or your clients should contract for the services of or invest with any of the independent advisors or hedge funds or others who may post on IB Traders' Insight or invest with any advisors or hedge funds. The advisors, hedge funds and other analysts who may post on IB Traders' Insight are independent of IB and IB does not make any representations or warranties concerning the past or future performance of these advisors, hedge funds and others or the accuracy of the information they provide. Interactive Brokers does not conduct a "suitability review" to make sure the trading of any advisor or hedge fund or other party is suitable for you.

Securities or other financial instruments mentioned in the material posted are not suitable for all investors. The material posted does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before making any investment or trade, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice. Past performance is no guarantee of future results.

Any information posted by employees of IB or an affiliated company is based upon information that is believed to be reliable. However, neither IB nor its affiliates warrant its completeness, accuracy or adequacy. IB does not make any representations or warranties concerning the past or future performance of any financial instrument. By posting material on IB Traders' Insight, IB is not representing that any particular financial instrument or trading strategy is appropriate for you.