???"The time of the ETF has arrived" - inflows in 2022, second highest ever [?? Priced in]

• US large-cap S&P 500 closed 0.08% DOWN ???
• Tech-heavy Nasdaq Composite closed 0.63% UP ▲?
• Pan European STOXX Europe 600 closed 1% UP ▲?
• HK's Hang Seng Index closed 1.89% UP ▲?
• Japan's Nikkei 225 closed 0.59% UP ▲

?? IN THE MARKETS

• Smaller US interest rate hikes, The biggest financial exchange you've never heard of, Europe's record low unemployment, Tesla cuts prices and angers customers, Emerging Market BULL

?? FOCUS

• "The time of the ETF has arrived" - inflows in 2022, second highest ever

?? MoneyFitt EXPLAINS

• ?? Priced in

?? IN THE MARKETS

SMALLER US INTEREST RATE HIKES

Stocks in the US started quite strong on Monday, led by tech shares, basically on the same data that had lifted them on Friday, namely the slowing pace of increase employees’ average hourly earnings and a weakening services sector. However, the rally fizzled out on Fed officials’ comments that the peak rate this year will still be somewhere above 5%.

Expectations are rising that the Fed will become less aggressive with its interest rate hikes and may even manage a "soft landing", in which inflation comes down without a massive surge in unemployment. Mary Daly, the president of the San Francisco Fed, said on Monday said that the Fed would consider raising the rates by just 25 basis points, or 0.25%, which would bring it to 4.50-4.75%. Her Atlanta Fed counterpart Raphael Bostic said rates should go above 5% by early in the second quarter, and then go on hold for “a long time.”

According to interest rate traders, as implied by 30-Day Fed Funds futures on the CME FedWatch Tool, the market is pricing in ?? a 79% chance of a 0.25% increase in interest rates at the next FOMC meeting in 22 days from now. This follows seven hikes in 2022, including four consecutive hikes of 0.75%, with the last one, in December, of 0.50%.?

THE BIGGEST FINANCIAL EXCHANGE YOU'VE NEVER HEARD OF

The CME, or Chicago Mercantile Exchange, is a futures exchange which trades in interest rates, currencies, indices, metals, and agricultural products. It's part of the CME Group, which includes the Chicago Board of Trade, the New York Mercantile Exchange and The Commodity Exchange, together making it the world's largest financial derivatives exchange. It includes both open outcry as well as electronic trading in futures and options. The CME was once called "The biggest financial exchange you have never heard of" by The Economist. It's also where you would trade cryptocurrency futures. If you really want to.

EUROPE'S RECORD LOW UNEMPLOYMENT?

Meanwhile, in Europe, following last Friday's lower-than-expected inflation print, November unemployment remained at the record low of 6.5%, in line with market expectations, showing that the labour market was still tight.?

A tight labour market means workers can push for higher wages to offset the cost of living crisis (from high price inflation) with less fear of losing their jobs and at the same time, companies can shove through price increases to maintain or boost their profit margins. This is the wage-price spiral that central banks around the world are desperate to avoid and puts increased pressure on the European Central Bank (ECB) to keep raising interest rates to cool the economy. With German industrial production also slightly better than expected, the ECB may feel any recession its rate hikes cause could be shallow.

TESLA CUTS PRICES, ANGERS CUSTOMERS?

Tesla cut the selling price of its cars in China for the second time in less than three months due to increasingly tough competition, with prices now between 13% and 24% below their September levels. As a result, hundreds of unhappy new Tesla owners gathered at showrooms and distribution centres in China over the weekend, demanding rebates and credit after sudden price cuts they said meant they had overpaid for electric cars they had literally just bought. In true Musk form, a spokesman for Tesla China told Reuters they do not plan to compensate any buyers. China contributed a third of Tesla's global sales in 2021, and with an expected growth of 30% in the China EV market in 2023, will remain a vital piece of the Tesla growth story.

EMERGING MARKET BULL

Another rally in China stocks on its zero-Covid reopening and stimulative policy changes (all despite growing healthcare challenges) helped overall emerging markets hit a 20% gain since the trough in LATE October. Emerging Market stocks have now made back half of what they had lost since the start of 2022 (which felt like 100 years ago.)?

Chinese stocks account for a third of the 24-country MSCI Emerging Markets Index and far more when China-focused firms listed elsewhere are included. The iShares MSCI Emerging Markets ETF (EEM) traded up 0.75% overnight and is now exactly 21% below its 52-week high and 21% above its 52-week low.)

A 20% rally is the marker (nowadays) for what traders call a "bull market" - one that goes up, and named, they say, because when bulls attack, they use their horns upwards (while bears smash downwards.) Note that this is a backwards-looking measure... saying "it's a bull market" means that it's a market that has already gone up 20% and says nothing about the future direction of trading. That said, a well-followed trading adage is "the trend is your friend," though all trends end at some point.

?? FOCUS

"The time of the ETF has arrived" - inflows in 2022, second highest ever

According to the world's largest fund manager, BlackRock, investors in 2022 ploughed US$867 billion into Exchange Traded Funds, or ETFs (actually ETPs, exchange-traded products, which include other similar products) in 2022. This was down from US$1.29 trillion in 2021, but was still the second biggest year of inflows, despite the wild swings in the year just past, with both stocks plunging alongside bonds, which faced central banks around the world hiking rates in their battle with inflation.

• "... we’ll look back on 2022 as the year mutual funds formally passed the baton to ETFs. The mutual fund is now dying as an investment vehicle. The time of the ETF has arrived." - Karim Chedid, iShares EMEA Head of Investment Strategy, BlackRock

Stocks were heavily down in 2022, with the MSCI World index down 15%. The S&P500 in the US and Europe's STOXX 600 were down 20% and 13%, yet equity ETFs saw inflows of US$598 billion, the second-highest on record. Cyclical sector ETFs were switched to defensives, like healthcare and utilities. And tech, despite the violent selloff, as investors took a long view and traders tried, as they do, to pick the bottom of the sector.

• "Only egotists and fools try to pick tops and bottoms. Which one are you?" - Barton Biggs (1932-2012), Founder of Morgan Stanley Investment Management

Interestingly, even though commodities was the best asset class for the second year running (the benchmark S&P GSCI ended 2022 UP by 8.7%), commodities ETFs as a whole saw net OUTflows of US$9.5 billion. Don't follow the herd.

??In Europe, sustainable ETFs saw inflows drop to $54bn from $100bn, but in the US, with the politicisation of the ESG space, inflows crashed to $5bn from $39bn.

BlackRock, incidentally, owns iShares, the world's largest ETF manager. Vanguard is the next biggest, followed some way behind by SPDR.

?? Mini-Explainer: Exchange Traded Funds (ETFs)

• An Exchange Traded Fund, or ETF, is a fund that you can buy and sell on a stock exchange just like a stock. Most (not all) ETFs are based on passively tracking an index and most (not all) have much lower fees than regular mutual funds. And not all passive funds are ETFs.?
• Passive funds have performed better over time than regular mutual funds, hence the rapid growth in ETFs. They are popular with both traders and long-term buy-and-hold investors.?
• The pricing of an ETF is set by the market based on buying and selling by traders and investors who keep a close eye on the value and movement of the underlying assets (such as an index.)
• Globally, ETFs are still only a fraction of the total assets under management, at 12% of equity assets in the US, 7% in Europe, and just 4% in Asia-Pacific, and even smaller in fixed income (Oct-22.)

ALSO: OUTFLOWS FROM US AND GLOBAL EQUITY FUNDS?

Even as global markets made a strong if volatile recovery from the lows last October, US equity funds saw seven straight weeks of outflows, driving Global equity funds to net outflows for the ninth straight week, according to Refinitiv Lipper data released overnight. However, investors were buyers of European and Asian funds.

MoneyFitt EXPLAINS?

??Priced in

It's rarely obvious what happens when news affecting a company or a market comes out. The most confusing thing is when something good happens to a company and the stock doesn't shoot up. Sometimes it does nothing or even goes down. What happened??

We say in the market that the market has "priced it in" or that the news or results are "in the price" or "factored in". This means that means the current value of the improved future prospects is already reflected in the price. (An old market saying that can apply here is "buy on rumour, sell on news.")

Inexperienced traders often see what IS positive news and buy. Thinking the fastest trigger finger will win, they often jump in without considering how much may have already been priced in. Sometimes you can't tell if the news has been priced in until AFTER you see how it trades because the market is made up of so many players with different amounts of information and expectations.?

Experienced investors are often caught off guard and surprised by news or results, too, despite their enormous resources, access to expert analysis, teams of researchers and gigantic salaries! Professional investors spend their entire careers trying to be brilliant at picking winning stocks or timing the market, yet many many studies show that the vast majority of them do worse over the long term than "index-hugging" ETFs.