Equity markets fell around the world in Wednesday trading as gloom and doom over the outlook of the global economy resurfaced thanks to the Fed’s new quantitative easing program and weaker than expected trade deficit numbers. While the Fed announced that it was going to reinvest the proceeds from its maturing mortgage-bond portfolios into Treasury Bonds yesterday, news broke this morning that the U.S. trade deficit widened to nearly $50 billion in June thanks to surging imports and slumping exports (which fell by 1.3% on the month). These disappointing reports helped to send equity markets tumbling with the Dow losing close to 2.5%, the S&P 500 falling by 2.8%, and the Nasdaq slumping by over 3%. This also pushed traders into the relative safety of gold and T-bills, which both saw their prices rise. The 10 year T-bill yield fell to below 2.7%.
The ETFdb 60 Index, a benchmark measuring the performance of asset classes available through ETFs, sunk by 19.19 points, or 1.8%. Losers outnumbered winners by five-to-one, pushing the benchmark into negative territory on the year. Trading was heavy on the day, with aggregate volume for index components topping 900 million shares.
One of the biggest losers on the day was the Vanguard European ETF (NYSEARCA:VGK), which fell by 4.9%. This sharp drop was thanks in large part to the high level of weakness in the United Kingdom market, which makes up 31.7% of the fund’s total assets. The U.K.’s fall can be attributed to the Bank of England cutting their growth forecast for the country to 3% from their 3.6% forecast earlier this year. “The important policy implication of this assessment is that the BOE seems now more inclined to keep the monetary accelerator pressed down for longer than it appeared likely in May, resuming the process of normalization by mid-2011,” said Chiara Corsa, economist at UniCredit Bank. That suggests that the British economy could be in for a continued rough patch going forward [see more charts of VGK here].
One of the biggest gainers in the ETFdb 60 was the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX), which jumped by 7.3% on the day. This spike came after the CBOE Volatilty index surged by 13.3% in Wednesday trading, suggesting that fear in the markets was rapidly accelerating. This was largely due to the extremely poor day in all the stock markets, which saw the Dow post its worst daily loss since late June. While this wasn’t welcome news for equity investors, demand for VXX surged with volume almost 8 million shares higher than normal. Despite today’s gain, VXX is down significantly in recent weeks, posting a loss of 10.9% over the past three months and a loss of 5.9% over the past two weeks [see more fundamentals of VXX here].
Disclosure: No positions at time of writing.