EMERGING MARKETS ISHARES HIT THREE-YEAR HIGH TO EXTEND BULLISH BREAKOUT -- EMERGING MARKET CURRENCIES ARE ALSO HAVING A GOOD YEAR, ESPECIALLY AGAINST THE EURO -- HIGHER YIELDING EMERGING MARKET BONDS ARE ALSO RISING -- CHINA BREAKOUT IS A BULLISH SIGN
EMERGING MARKET ISHARES REACH THREE-YEAR HIGH ... The weekly bars in Chart 1 show Emerging Markets iShares (EEM) now trading at the highest level in three years. Just over a month ago, the EEM broke above its late 2012 high near 44.00. That bullish breakout bodes well for emerging market assets. Their longer range chart pattern also looks bullish.
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Chart 1
EMERGING MARKETS ARE NEARING RECORD HIGH... The weekly bars in Chart 2 show that Emerging Market iShares (EEM) have been trading sideways since 2007 in a huge consolidation formation. That's normally a bullish pattern. The recent upside breakout has put the EEM in position to challenge a resistance line drawn over its 2007/2011 highs. The solid line (top of chart) plots a ratio of the EEM divided by EAFE iShares (EFA). The EEM/EFA ratio has been rising during 2014 for the first time in three years. That means that emerging markets are starting to do better than foreign developed markets. They're also doing better than the U.S. The EEM has gained 9.6% this year versus an 8.2% gain in the S&P 500 and a much smaller gain of 2.4% by EAFE iShares.
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Chart 2
EMERGING MARKET CURRENCIES ARE ALSO STRONG... The green line in Chart 3 shows the Wisdom Tree Emerging Currency Fund (CEW) rising since the start of year. The CEW gain of 1.9% during 2014 has lagged behind a 3% gain for the U.S. Dollar. Emerging market currencies, however, have done better than the Japanese yen (1.2%), the British Pound (-0.10%), the Canadian Dollar (-3%), and the Euro (-4.2%) during the first eight months of the year. Part of the reason for the inflows into emerging market assets has been historically low interest rates in developed markets, especially Europe and Japan. Some of that money has found its way into the U.S. whose rates are slightly higher. It appears, however, that a lot of the funds flowing out of Europe and Japan have moved into emerging markets in the search for higher yield. The biggest gains in emerging market currencies have come against the falling Euro. The dashed blue line shows the CEW gaining ground against the Euro since the first quarter.
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Chart 3
EMERGING BONDS RALLY AS WELL ... Money is also flowing into emerging market bonds which offer yields as high as 5%. That compares to less than 1% in Germany and 0.50% in Japan (and 2.36% in the U.S.). The green bars in Chart 4 show the JPMorgan USD Emerging Markets Bond iShares (EMB) trading at a new high for the year. That emerging bond ETF is denominated in U.S. dollars. The red line shows the EM Local Currency bond iShares (LEMB) also rising, but not as fast. That's because investors are favoring emerging bonds quoted in the stronger dollar. But the fact that local currency bonds are also rising is a positive sign for that asset class.
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Chart 4
CHINA ISHARES REACH THREE-YEAR HIGH ... The biggest influence on emerging market stocks comes from China. Chart 5 shows China iShares (FXI) trading at the highest level in three years. That's a good sign for China and emerging markets in general. Other big emerging market winners this year have been India (+31%) and Brazil (20%). Global investors have viewed emerging markets as the most undervalued part of the global market. Falling bond yields around the world are another impetus for money flows into emerging markets. Although the Fed is expected to end its bond buying program this October, Japan is still in the middle of a bond buying program and the Eurozone appears ready to launch one of its own. That should keep downward pressure on global bond yields and upward pressure on higher-yielding emerging market stocks, bonds, and currencies.
