The Xchange Blog

Trade War Trades

With trade wars constantly in the news, global markets have been choppy. U.S. tariffs on goods from China, Canada and Europe, have resulted in counter-tariffs. Canada applied duties on orange juice, yogurt, whiskey, maple syrup and soups. China will soon start collecting new tariffs on U.S. pork and dairy products, and soybeans.

While the S&P 500 index has managed to climb back to its January 1 level, the German DAX is down nearly 4.5 percent from its recent high, and China’s Hang Seng is down by more than 8 percent in the past couple of weeks. With no signs of global trade harmony being restored any time soon, some traders are preparing to hold out in uncertainty. A cursory look at a few Direxion leveraged bear ETFs puts this fact into stark relief.

China

Certainly one of the most visible bear targets, Chinese industry has been hit hard by the first round of tariffs on steel and aluminum exports. The most recent sell-off in Chinese equity came on the threat of investment restrictions on Chinese-owned companies into U.S. Companies. This, in addition to proposed tariffs on Chinese Electronics, aim to hit the country in its thriving tech industry.

The Direxion Daily FTSE China Bear 3X Shares (NYSE:YANG) was up 21.27 percent in June.

Data Range: 6/1/2018 – 6/30/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed may be worth more or less than their original cost and that current performance may be lower or higher than the performance data quoted. For standardized performance and the most recent month-end performance,
click here.

 

Emerging Markets

Although China is an obvious bear pick, perhaps the biggest losers from the Administration’s pervasive trade gambit are emerging market economies who are stuck in the middle. Aside from direct tariff targets like China and Mexico, other emerging market countries like South Korea, India and Taiwan are in the precarious position of having their trade relationships strained as a result of the tariffs being lobbed around them. This is only compounded by rising global interest rates, the sustained strength of the U.S. dollar and high oil and raw material prices putting the kibosh on growth or investment initiatives. However, China is attempting to mitigate some of the impact by drawing back tariffs on some of its regional trade partners.

The Direxion Daily MSCI Emerging Markets Bear 3X Shares ETF (EDZ) was up 13.85 percent in June.

Data Range: 6/1/2018 – 6/30/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed may be worth more or less than their original cost and that current performance may be lower or higher than the performance data quoted. For standardized performance and the most recent month-end performance, click here.

 

The United States

While there might be some winners in a trade war, they historically haven’t been on either side of the tariffs. U.S. farmers are already on edge from Chinese tariffs placed on American produce and livestock, but the President’s most recent tariffs on European steel and Chinese technology have put direct and indirect strain on Harley-Davidson Inc. which was forced to move its production to Europe following the EU’s tax on American motorcycles, as well as Alphabet Inc. and General Motors Company which are both reliant on component devices built in China.

The Direxion Daily S&P 500 Bear 3X Shares (NYSE:SPXS) was down -1.60 percent in June.

Data Range: 6/1/2018 – 6/30/2018. Source: Bloomberg. The performance data quoted represents past performance. For standardized performance and the most recent month-end performance, click here.

 

Whether or not trade wars are a good thing for any country involved, one thing maybe certain: Higher tariffs result in higher costs. In today’s interconnected markets, engaging in trade wars is risky and costly.

However, your trade on trade war can be won, only if you get the direction right.  Trade boldly.

Related Leveraged ETFs

 


Each leveraged ETF seeks investment results that are 300% of the return of its benchmark index for a single day. Each Fund should not be expected to provide returns which are the return of benchmark’s cumulative return for periods greater than a day. Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged investment results and intend to actively monitor and manage their investment.
 
An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Each Fund does not attempt to, and should not be expected to, provide returns which are three times the return of their underlying index for periods other than a single day.
 
YANG Risks – Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-Day Investment Risk, risks specific to Chinese securities, such as Chinese Government Risk, Chinese Markets Risk, Chinese Currency Risk, Emerging Market Risk, and Hong Kong Securities Risk, Daily Inverse Index Correlation/Tracking Risk and risks related to Shorting and Cash Transactions. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.
 
EDZ Risks – Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-Day Investment Risk, risks specific to investment in Emerging Markets and emerging markets countries, such as China, Daily Inverse Index Correlation/Tracking Risk and risks related to Shorting and Cash Transactions. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.
 
SPXS Risks – Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-Day Investment Risk, risks specific to the securities that comprise the S&P 500® Index, Daily Inverse Index Correlation/Tracking Risk and risks related to Shorting and Cash Transactions. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.
 
FTSE China 50 Index (TXIN0UNU) – Consists of the 50 largest and most liquid public Chinese companies currently trading on the Hong Kong Stock Exchange (“SEHK”). Securities in the Index are weighted based on the total market value of their shares, so that securities with higher total market values will generally have a higher representation in the Index. Index constituents are screened for liquidity and weightings and are capped to prevent the Index from being overly concentrated in any one stock. One cannot directly invest in an index.
 
MSCI Emerging Market Index (NDUEEGF) – A free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. One cannot directly invest in an index.
 
S&P 500 Index (SPXT) – Standard & Poor’s® selects the stocks comprising the S&P 500® Index (SPXT) on the basis of market capitalization, financial viability of the company and the public float, liquidity and price of a company’s shares outstanding. The Index is a float-adjusted, market capitalization-weighted index. One cannot directly invest in an index.