WisdomTree Chinese Yuan (CYB)
WisdomTree Bloomberg USD Bullish (USDU)
CurrencyShares Euro Trust (FXE)
CurrencyShares Swedish Krona (FXS)
CurrencyShares Canadian Dollar (FXC)
WisdomTree Emerging Market Currency (CEW)
WisdomTree Commodity Currency (CCX)
PowerShares DB U.S. Dollar Bullish Index (UUP)
A sharp drop in the offshore yuan (CNH) during the first week of January pulled the onshore yuan (CNY) lower, unnerving investors and triggering volatility throughout most markets. The Australian dollar slid near its 52-week lows over the past week, while the Canadian dollar and some emerging market currencies fell to new lows. The British pound also fell to a new 52-week low versus the dollar. The euro, which is by far the largest weight in the U.S. Dollar Index, has remained relatively stable. UUP tracks using futures contracts, but USDU, uses a broader index that includes emerging markets and has already established a bull rally.
The yen is back near its 52-week highs in response to China’s weakness. The yen is used for the carry trade: traders borrow in yen and invest the money in Japanese stocks or overseas assets. When the market for those assets reverses, traders close their positions. The bottom chart depicts the correlations between the USDJPY exchange rate and the S&P 500. The yen and the S&P 500 Index have both been in a holding pattern since late 2014.
The bear market in commodities is still going strong. Gasoline prices started 2016 with a tumble after inventories increased, subsequently pulling oil prices lower to briefly push West Texas Intermediate Crude below $30 a barrel. Energy stocks broke lower as well, driving past the August 2015 lows and even through 2012 lows. Shares of XLE could find some support here, but a further drop will open up the $45 low set in 2010, a decline of nearly 18 percent from current levels.
Coal, copper and steel all fell to new lows in 2016. China is supposed to slash excess capacity this year, which would go a long way to shoring up global prices. Historically, factories have used the Chinese New Year holiday to implement closings as workers travel home for the one- to two-week holiday. Chinese New Year is February 8 this year.
iShares Biotechnology (IBB)
Biotechnology shares are testing their 52-week lows at the moment. Large-cap IBB is holding at the lows, but two ETFs with exposure to smaller companies, XBI and FBT, have broken those lows. If IBB follows, the next support level is $275 per share, about 5 percent below current levels. In contrast to biotech, the healthcare sector is maintaining its composure, with XLV still above its August lows, due to strength in pharma and medical devices. Healthcare providers, tracked by IHF, have been in a downtrend since June.
iShares MSCI Emerging Markets (EEM)
EEM broke lower last week and the downside target is $25 a share. The $31 level now marks resistance.
Weekly sector performance held no surprises. Energy and materials led the way lower on China weakness and falling commodity prices. A transient shift in rate hike expectations repressed the financial sector and healthcare struggled under sliding Nasdaq and biotech numbers. The overall tech sector, however, performed ahead of many other sectors as large-cap, dividend-paying tech firms outperformed. The defensive consumer staples and utility sectors held up the best.
High-yield bonds have held firm since a 52-week low on December 14, but prices are only 1 percent above those lows. A financial market rebound is likely with stability in high-yield. Investment-grade bond prices have risen against falling interest rates. The 10-year treasury yield is still above 2 percent to continue the past year’s uptrend.
Weakness in currencies such as the Canadian dollar and South African rand, combined with a relatively strong gold price (compared to other commodities) could impact the outlook for overseas gold. These miners pay many expenses in local currency. Other expenses, such as energy, are cheap relative to the price of gold. The key level to watch on GDX is $13. A break below will signal gold is going to follow other commodities lower.
The small-cap Russell 2000 Index is down more than 20 percent from its June 2015 peak. Small-caps have been underperforming the large-cap S&P 500 going back to March 2014. Mid-caps have fared better, but not by much. Dividend shares continued their stretch of outperformance which started shortly before the Federal Reserve announced its rate hike. The Nasdaq slipped on some weakness in Internet shares in 2016, but there’s no sign yet the index has finished outperforming the S&P 500 Index.
Two of the better-performing foreign stock ETFs have been the Ireland and Denmark funds. These funds have seen much bullish action since May 2015, mainly trading sideways, but that’s far better than the Eurozone index which peaked in May. Ireland uses the euro, but Denmark does not, so this is not merely a currency effect.