FALLING DOLLAR CONTRIBUTES TO RISING EMERGING MARKET CURRENCIES AND STOCKS -- MEXICAN PESO AND STOCK ETF ALSO GAIN GROUND -- A RISING YUAN IS HELPING BOOST CHINESE STOCKS -- STOCK GAINS EVAPORATE ON POSTPONEMENT OF HEALTHCARE VOTE
EMERGING MARKET CURRENCIES SUPPORT RISING STOCKS... Previous messages have shown the rise in emerging market stocks, partially owing to the drop in the U.S. dollar. The same can be said of EM currencies. The red line in Chart 1 shows Emerging Markets iShares (EEM) rising to the highest level since mid-2015. Emerging market stocks have risen twice as much as developed markets stocks, which include the U.S. Emerging markets have gotten a boost over the past week as the dollar has weakened and Treasury yields have dropped. That has also pushed money into higher-yielding emerging currencies. The green line in Chart 1 shows the WisdomTree Emerging Currency ETF (CEW) rising in sync with EM stocks since the start of 2016 and again over the last week. The CEW is nearing a test of its mid-2016 high. Rising EM currencies are positive for EM stocks because the two lines usually trend in same direction. Which right now is up. Most of the recent currency gains have come from Asia, which include the Chinese yuan. The Mexican peso has also contributed to the currency rally along with Mexican stocks.
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Chart 1
MEXICAN PESO IS RISING WITH STOCKS ... The Mexican peso tumbled after the November election on fears that a Trump win would hurt trade with that country. That pushed the peso to the lowest level on record against the U.S. dollar. That's no longer the case. Chart 2 shows the Mexican Peso to the U.S. Dollar rising to the highest level since the election. It's also cleared its 200-day average. The peso has been one of the strongest emerging currencies this year. That's given a boost to Mexican stocks. Chart 3 shows Mexico iShares (EWW) climbing to the highest level since November as well. Since the EWW is quoted in U.S. dollars, it gets an added boost from the rising peso. I'm not sure what political message to read into that, but it's probably a positive one. The move into emerging markets suggests that global investors are still searching for higher yields and are taking on more risk. The recent move into Chinese assets is another sign of that.
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Chart 2
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Chart 3
CHINESE MARKETS ARE ALSO RISING ... The China central bank raised interest on the same day as the Fed last week, which boosted the Chinese yuan. Chinese stocks have been rising as well. Stocks in Hong Kong have risen 15% this year to the highest level since mid-2015. The red line in Chart 4 shows the CSI 300 China A-Shares ETF (ASHR) rising nearly 8% since the start of the year. The green line shows the Chinese yuan gaining ground over the same time span. That's another sign of growing confidence in the global economy. A stronger China may also explain why Asian markets have been doing so well of late.
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Chart 4
STOCKS AWAIT HEALTHCARE VOTE... Early stock gains evaporated late in the day on postponement of the House vote on healthcare. The consensus view seems to be that a "no" vote on the Republican healthcare package would likely postpone legislation on tax reform an infrastructure spending. Market gains since the election have been built largely on expectation for that fiscal stimulus. Tuesday's heavy volume selloff also damaged the market's short -term trend. Chart 5 shows the S&P 500 SPDR (SPY) in danger of dropping to its 50-day average. That would be the first serious test of the post-election rally that started in early November. A Friday vote is still possible.
