Messages From Emerging Markets and Cyclicals

By Chris Ciovacco

Emerging Markets Break Out

Assisted in part by some improvement in China, emerging markets (EEM) recently cleared a resistance zone that had bounded prices for several months. From Bloomberg:

Since China is a major export market for developing nations from Brazil to South Africa, signs of an improvement in the nation’s manufacturing industry bolsters the case for investing in riskier assets….“Reasonable data from China has opened a window for emerging markets to outperform,” said Maarten-Jan Bakkum, a senior strategist at NN Investment Partners in The Hague, who favors Indian shares. “Emerging markets have been very strong relative to developed markets in the past week.”

Improvement Relative To Defensive Assets

A tick up in the market’s tolerance for risk can be seen in the chart below, which shows the performance of emerging markets relative to intermediate-term Treasuries (IEF). Increasing expectations for even more easing from central banks have assisted numerous risk markets since the Brexit referendum, including emerging economies.

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Inflection Point for EM

By Doug Noland

Credit Bubble Bulletin: Inflection Point for EM

Don’t let a relatively tame week in the S&P 500 engender complacency. Perhaps it was not obvious, yet the trading week provided important confirmation for the incipient “Risk Off” dynamic thesis. Indeed, the global bear seemed to roar back to life. Stocks were lower, financial stocks were under heavy selling pressure, and some commodities reversed sharply lower, while safe haven bonds were in high demand. It’s worth noting that financial stocks lagged during the recent global risk market rally and now lead on the downside.

Japan’s Nikkei equities index dropped 3.4% this week, boosting its two-week drop to 8.3% (down 15.4% y-t-d). The Nikkei closed the week at 16,107. Keep in mind that the Nikkei traded at about 20,000 this past December (and about 39,000 in December 1989), and is now only about 1,000 points off February lows. Japanese financial shares trade even worse than the major indices. Japan’s Topix Bank Stock Index sank 4.6%, with a two-week decline of 12.8% (down 32.5% y-t-d). The Topix Bank Stock index traded at 250 last summer and closed Friday at 140.

Chinese stocks (Shanghai Comp) declined another 0.9%, increasing 2016 losses to 17.7%. Hong Kong’s Hang Seng Financial Index fell 5.0%, with a two-week decline of 7.6%. The Singapore Straits Times equities index lost 7.1% over two weeks, with financial share weakness behind 10 straight losing sessions.

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