Emerging market equity and commodity ETPs saw inflows following the Federal Reserve’s decision last week to raise interest rates once again, despite these areas of the market being traditionally considered interest rate sensitive and often suffering redemptions around rate hikes.
BlackRock’s ETP business iShares reports its MSCI Emerging Markets ETF traded at 627% its average daily trading volume, which bucks the usual trend.
On Wednesday 15 March, the Federal Reserve announced its third rate hike since December 2015, increasing its Federal Funds Rate by another 25bps to 0.75%-1%.
In its forward guidance, the Federal Open Market Committee (FOMC) also hinted at two further rate rises over the course of 2017. However, this fell short of the bullish expectations of some market participants, who were forecasting three more hikes this year, leading some to name the Fed’s actions a “dovish hike”.
As a result, the US dollar reacted in an unusual way, falling 0.7% against a basket of peers on the news, despite almost universal expectations of a rise in the greenback following a rate hike. This meant that markets which are usually hit by the dollar’s strength, most notably emerging markets, were not negatively impacted by the news.
According to iShares, investors were taking advantage of this in the aftermath of the vote by putting money into EM equities. Its iShares MSCI EM UCITS USD ETF was the most traded of its products on 16 March, with trading volumes hitting $125bn versus the average volume of around $30bn seen in this product so far this year.
Meanwhile, commodities also bounced back as a result of a weaker dollar, causing a rebound of flows into high yield and gold ETPs; iShares $ High Yield Corporate Bond ETF saw increased trading volumes on Thursday, seeing a turnaround of $96bn on the day after five sessions of outflows.
Meanwhile, TrackInsight’s data showed that the iShares iBoxx $ High Yield Corporate Bond ETF saw the third highest inflows on Thursday 16 March, attracting some €403m from European investors during the day.
Wei Li, head of iShares EMEA investment strategy at BlackRock, commented: “Surprisingly, EM equities outperformed the broad equity market in yesterday’s trading session.
“The reason for this may be that while markets had priced in the rate rise, the ‘dot plot’, which indicates that two more hikes are expected for the rest of the year, remained unchanged. This was read by the market as dovish, given how far the markets had already priced in the rate rise.”