Month: October 2015

iShares MSCI Emerging Markets (EEM)

Emerging market ETFs are near their 52-week lows and remain an important bellwether of market trends, especially in light of continued economic troubles in countries such as China and Brazil. The past week has proven encouraging for the sector, though, with EEM gaining more than 7 percent. One factor aiding the asset class may be the fact that the Chinese market has been on vacation for a full week, but resumes trading today.

WisdomTree Chinese Yuan (CYB)
WisdomTree Bloomberg USD Bullish (USDU)
CurrencyShares Euro Trust (FXE)
CurrencyShares Japanese Yen (FXY)
CurrencyShares Australian Dollar (FXA)
CurrencyShares Canadian Dollar (FXC)
WisdomTree Emerging Market Currency (CEW)
WisdomTree Commodity Currency (CCX)
PowerShares DB U.S. Dollar Bullish Index (UUP)

Emerging market currencies rebounded along with their respective markets in the past week, but it didn’t have a large impact on the U.S. dollar, which remains in a short-term uptrend. Both USDU and UUP have been making a series of higher lows since August. The Australian and Canadian dollars also rallied while the yen held steady. The euro is effectively unchanged. The driving force behind emerging market currencies was a rebound in energy and commodity prices.

SPDR Energy (XLE)
FirstTrust ISE Revere Natural Gas (FCG)
Global X Copper Miners (COPX)
Market Vectors Coal (KOL)
Market Vectors Steel (SLX)

A jump in prices pushed black gold to its highest level since mid-summer, propelling the energy sector with it and catching short-sellers unaware. Despite the rebound, the oil market remains in an intermediate-term and long-term bear market.

Copper prices did not see a rebound of similar size, but copper mining shares rallied strongly along with steel makers and coal miners. The rally may have been touched off by a rebound in shares of Glencore (or vice versa), a major commodities trader. Many bears believe the firm is headed for bankruptcy, but shares spiked over the past week after the firm’s declaration of financial backing. We saw similar events during 2008, but at the time those statements of liquidity didn’t hold up because investors feared the firms’ debt load was unsustainable. Glencore may only survive if commodity prices remain elevated. For now, the firm has been given at least a temporary reprieve.

SPDR Utilities (XLU)
SPDR Pharmaceuticals (XPH)
SPDR Materials (XLB)
SPDR Consumer Staples (XLP)
SPDR Consumer Discretionary (XLY)
SPDR Healthcare (XLV)
SPDR Technology (XLK)
SPDR Financials (XLF)

Energy was far and away the best performing sector in the S&P 500 Index last week, but it was not alone in positive territory. All sectors were up, with a 0.74 percent gain in utilities trailing the field. Behind the gain in energy was a solid advance in materials, nearly double the return of the next best sector, industrials.

A rise in energy prices is sometimes problematic for transportation stocks, but the oversold sector rallied along with commodity shares in the past week. IYT is well off its August lows, but has yet to break the downtrend begun in early 2015.

Falling interest rates were partly responsible for the rally in the utilities and real estate sectors last week, but the slide in rates have since halted in October.

Financial shares moved higher and regional banks improved their relative performance, regaining some ground versus the larger banks. Low interest rates have been a hurdle for the sector, but continued strength in the smaller banks remains a bullish sign.

Housing shares, which initially flirted with a breakdown, rebounded towards their average prices dating back to February. The August breakout is history, but shares could challenge this trading range again if they rally back towards the $29 level.

SPDR Gold Shares (GLD)

Although commodities have witnessed gains, gold has been behaving much like currency, which typically rises when the market is in turmoil or when investors think a fourth round of quantitative easing may be a possibility. GLD is up from its lows at $104 in August and made a series of higher lows, but these small rallies often die. A rally above the August high would be short-term bullish, but a retest of those lows remains the most likely outcome.

iShares iBoxx High Yield Corporate Bond (HYG)
iShares iBoxx Investment Grade Corporate Bond (LQD)

One of funds most affected by weak energy prices in the past year has been high-yield debt. Due to shale oil companies raising capital with high-yield bonds, the high-yield index funds have been under some pressure as oil prices reached new lows. Last week’s sharp rally was therefore good news, and high-yield bonds rallied relative to investment grade bonds.

Investors have again turned bullish after a one-month round of selling, as the rally in equities that began on Friday and carried into early trading today. Last week, the government reported job growth was much slower than expected in September, sparking an immediate sell-off in equities that reversed throughout the day, eventually turning into a substantial rally. If that is a news driven event, the best explanation is investors are reacting positively a further delay in rate hikes.  Job data for September seems to confirm the Fed’s decision to be cautious and investors are buying on the delay.

The best explanation for the shift in mood may be that investors were overly pessimistic in September. A week ago, Mark Hulbert reported his Nasdaq Newsletter Sentiment Index was at the lowest level since the bursting of the 2000 Internet bubble, indicating extreme pessimism. Usually this is a contrarian signal and the rally since Friday, in the face of negative economic news, is indicative of an improvement in the outlook on the market. Investors will likely continue turning more optimistic during the week, and anything remotely positive, from earnings reports to the Fed minutes, could help fuel a rally.

Earnings season will kick off over the coming days with Pepsi (PEP), Monsanto (MON), Alcoa (AA), Domino’s (DPZ) and Yum! Brands (YUM) reporting. This is a great cross section of the current economy. Alcoa operates in the hardest hit sector of the global economy: industrial commodities. China is most responsible for weakness in commodities due to its economic slowdown and rebalancing. That said, there’s a debate about the slowdown as bulls think China’s rebalancing is going well, with services and consumption making up for losses in heavy industries. Bears believe the government is fudging the data and underlying growth is still much slower than what is being reported. YUM, whose KFC stores are a common sight across China, could shed some light on the subject. Global multinational Pepsi will give a preview of the global economy and how currency fluctuations may affect other multinational firms.

Economic data will be very light this week. The trade deficit, consumer credit, and wholesale inventories for August, are the biggest items. The most important for GDP growth estimates is wholesale inventories; this number has frequently caused an adjustment in the Atlanta Federal Reserve’s GDP Now model.

Investors will focus on the minutes of the September 17 Federal Reserve meeting. The minutes from the previous meeting showed officials debated the policy of reinvesting the interest from assets purchased during the three rounds of quantitative easing. Earlier in the year, Janet Yellen said the Fed would likely end these purchases after raising interest rates. A rate hike was clearly on the table heading into September for officials to be debating reinvestment.

In the statement announcing their decision to leave rates unchanged, however, Federal Reserve officials didn’t give any explanation, with only one sentence referencing concerns about the global economy. Speculators have pushed their rate hike expectations to 2016, with odds currently at 55 percent. December rate hike odds are currently at 32 percent. Interest rates fell sharply last week, with the 10-year Treasury yield falling below 2 percent. Less than three weeks ago, the 10-year Treasury yield was 2.3 percent.