EAFE AND EEM ISHARES EARLY BOUNCE FADES -- EMERGING MARKET BONDS AND CURRENCIES ARE BOUNCING -- THE EURO RALLY HAS RUN INTO A MAJOR RESISTANCE LINE -- A STRONGER EURO HAS BOOSTED THE RELATIVE PERFORMANCE OF EUROZONE STOCKS OVER LAST TWO YEARS
FOREIGN STOCK ETFS EARLY GAINS FADE... Foreign stock markets turned in a stronger performance earlier today, but their gains faded by day's end. Chart 1 shows EAFE iShares (which measures developed markets) trading above its 50-day moving average for most of the day. An afternoon fade, however, erased the day's gains and left it sitting right on the 50-day line. Chart 2 shows Emerging Markets IShares (EEM) trading above its 200-day moving average, and challenging its early March high. But it too closed near the lower end of today's range. I had suggested recently that the EEM needed to clear those chart barriers to improve its short-term chart picture. So far, it hasn't done that in convincing fashion. But there is improvement in other emerging assets.
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Chart 1
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Chart 2
EMERGING MARKET LOCAL CURRENCY BOND FUND IS BOUNCING AS WELL... Chart 3 shows Emerging Markets Local Currency Bond iShares (LEMB) climbing above its 200-day moving average after a successful test of its September low (see circles). That also shows some increased confidence in that asset class. The chart also shows a generally inverse relationship between the LEMB and the 10-Year T-Note Yield over the last year. Emerging market bonds were crushed last May (along with stocks and currencies) when U.S. bond yields spiked higher. That followed Mr. Bernanke's first mention of the Fed's intention to start "tapering" its bond purchases. Rising U.S. bond yields caused higher-yielding (and riskier emerging market) assets to plunge. The decline in U.S. bond yields during the first quarter is causing some of that global money to move back into emerging market assets. What's also notable about Chart 3 is that the EM bonds are quoted in local currencies. That shows that investors are also starting to nibble at EM currencies as well.
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Chart 3
EMERGING MARKET CURRENCIES ALSO BOUNCE OFF CHART SUPPORT... The green line in Chart 4 shows the WisdomTree Dreyfus Emerging Currency ETF (CEW) starting to bounce off major chart support along its 2011, 2012, and 2013 lows. Notice that the CEW also plunged last spring (down arrow) along with Emerging Market iShares (red line). The ability of the currency fund to stay above such important support is important because the CEW is highly correlated to emerging market stocks and bonds. A bounce in EM currencies is helping support the rally in EM stocks (see circles). That's also helping emerging market bonds quoted in local currencies.
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Chart 4
RISING EURO TESTS MAJOR RESISTANCE LINE... The direction of the Euro should play an important role for European stocks and their economy. Chart 5 shows that the Euro peaked in 2008 (when the dollar bottomed). The Euro has been gaining ground since mid-2012 and is now trading at the highest level against the dollar in two years. But it's now up against an important resistance barrier, which is the falling trendline drawn over its 2008 and 2011 peaks (see arrows). That's an important test, and it's coming at an important time. The European central bank has expressed concern about the fact that the rising Euro is keeping eurozone inflation at a dangerously low level, and increases the threat of deflation. For the first time, some ECB ministers are talking about more monetary stimulus which might even include the purchase of government bonds (quantitative easing). That would be happening while the Fed is winding down its QE buying. Whether or not they do that, and how the Euro reacts from here, has implications for Eurozone stocks.
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Chart 5
EMU ISHARES LAG BEHIND U.S. MARKET... The weekly bars in Chart 6 show EMU Index iShares (EZU) trading at the highest level since 2008 (see circle). The EZU includes stocks from ten eurozone countries that use the common currency (Euro). Its biggest weightings belong to France (31%), Germany (29%), Spain (11%), the Netherlands (10%), and Italy (7%). Having cleared its 2011 peak, the chart has a positive look to it. But it remains well below its 2007 peak. That contrasts with the U.S. market which cleared that peak a year ago. Which brings us to the subject of "relative" performance. Since the 2007 peak, the EZU has lost -10% versus a gain of 24% for the S&P 500. Since the spring 2009 bottom, the S&P has outpaced the EZU by a 154% to 119% margin. Since spring 2012, however, the EZU has done better than the S&P by a 40% to 32% margin. I believe that the direction of the Euro has played an important role in the recent stronger performance of eurozone stocks.
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Chart 6
EUROPE HAS BEEN DOING BETTER THAN THE U.S.... Chart 7 plots a relative strength "ratio" of EMU iShares (EZU) divided by the S&P 500. The chart shows the Euro/U.S. ratio peaking during 2008 and continuing to drop for four years. In other words, eurozone stocks did worse than the U.S. during those four years. The box to the bottom right, however, shows the ratio bottoming in 2012 and rising over the last two years. The ratio also broke a falling resistance line extending back to 2009. That means that eurozone stocks have done better than the U.S. over those last two years. Now let's examine why. Chart 8 overlays the Euro (solid area) over the same EZU/SPX ratio shown in Chart 7 (blue line). The correlation between the Euro and the Eurozone/U.S. ratio is striking. Both peaked in 2008 and bottomed together during 2012. The rising Euro since 2012 has also coincided with stronger Eurozone performance. Which brings us back to the Euro testing the resistance line in Chart 5. What it does from there will determine not only its direction, but that of the U.S. dollar. [The Euro accounts for 57% of the Dollar Index]. Although the ECB appears to prefer a weaker Euro, holders of eurozone stocks might prefer just the opposite.
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Chart 7
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Chart 8
NASDAQ AND SMALL CAPS LEAD MARKET LOWER... An early stock bounce in the U.S. faded this afternoon. Two of the biggest losers were the Nasdaq Composite and small cap indexes. Chart 9 shows the Nasdaq Composite Index losing -1.4% and undercutting its 50-day moving average. The Nasdaq/SPX ratio (top of chart) has fallen this month. Chart 10 shows the Russell 2000 Small Cap Index ($RUT) falling 2% to a new low for the month and also ending below its 50-day line. The RUT/SPX ratio (top of chart) is falling as well. Their daily MACD indicators remain negative. It's not a good sign when both groups are leading the market lower. Bond prices jumped.
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Chart 9
