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International Flows: Japan’s Monetary Policy and Emerging Market Fears Abate



US Treasury yields and emerging markets

On an international level, in the week ending June 3, 2016, all eyes were on Japan, as Prime Minister Shinzo Abe did not provide the fiscal stimulus details that investors had hoped for. Consequently, the WisdomTree Japan Hedged Equity Fund (DXJ) fell by ~3.5% during the week ending June 3, 2016, and witnessed the largest outflows within the Market Realist country ETF universe.

Meanwhile, we’ve been watching the impact of US Treasury rates on emerging market equities and currencies, noting that yields in the US could lead to another “taper tantrum.” Emerging market investors seem to fear higher US yields as they become more competitive with emerging market country yields—a trend that has led to capital flights in the past out of ETFs such as EWZ.

By the same logic, this helps explain how the drop in US Treasury yields during the same week sparked large inflows in the iShares Core MSCI Emerging Markets ETF (IEMG). Clearly, investor hopes for an emerging market outperformance have risen on the horizon.

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