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)
Emerging market currencies stabilized over the past few days. China’s trade data was subpar in August and the country spent approximately $100 billion defending the yuan over the course of three weeks. Although China’s reserves are large, the $100 billion was spent in a month when most investors still didn’t believe the yuan would ever fall in value. If speculators begin attacking the yuan, the country could easily spend $200 billion or more in a very short period of time. Doing so would invite more speculation that the currency may fall. It would only take a few months of this occurring for China to burn through hundreds of billions of dollars. At some point, they will either run out of liquid assets (not all their $3.5 trillion in reserves is available to spend) or decide it’s no longer worth depleting reserves to keep the currency elevated.
The yen weakened this week and that helped propel the Nikkei to a 7.7 percent gain on Wednesday, the largest gain since October 2008. A weaker yen is good news for Japanese stocks as well as global financial markets. When the yen rallies, it tends to accompany global selling of equities. Investors expect the Bank of Japan may increase its quantitative easing program soon, which would send the yen lower and equities higher.
Oil prices consolidated their gains in the past week, while copper enjoyed a breakout rally. It didn’t reach the level of oil’s 25 percent gain, but prices are up a healthy 8 percent from recent lows. Copper is a key commodity and China’s slowing economy is mainly responsible for the fall in its prices. Over the past week, investors interpreted weak trade data as being good news for more stimulus in China, which might help copper prices if it materializes. So far, the government has only committed itself to doing a targeted “micro” stimulus.
Oil stocks are still not pricing in the full rebound in oil prices. These shares have room to rally if oil can hang on to its recent gains.
Thus far, September has proven to be off to a good start for stocks. Every sector has gained this month, led by rebounding technology, industrials, consumer discretionary and healthcare. Energy and utilities, which enjoyed rebounds, saw smaller gains this month.
We’ve been watching the relative performance of regional versus the large banks. Regional banks are still outperforming, which is what we would expect if interest rates are headed higher. Both regional and large banks were hit by the sell-off in stocks, and remain below their highs for the year. That said, the strength in regional banks is encouraging.
Housing is the strongest sector in the market at the moment, which is very surprising given the expected rate hike. There is a lot of pessimism in the market right now, but the strength in housing is extremely bullish. While markets may be volatile over the short-term, the performance of homebuilders is pointing to long-term strength in the U.S. economy.
The chart of the iShares US Consumer Services ETF (IYC) will be a good proxy for the market. Notice how it spent four months between $142.50 and $147.50 per share, hitting that bottom support level multiple times. Now IYC is back to the underside of this former support and now line of resistance. In the days ahead, if we see stocks with a pattern like IYC break higher, it would improve the picture for the bulls greatly.
Even though major indexes are all below their highs for the year, the Nasdaq is back in the black thanks to the rebounding technology sector. Apple’s (AAPL) product launch today could give a boost to the technology indexes. Technology has been a leading sector the past few years and the strength here is encouraging. The key level to watch on SPY is the $200 level, which is a 50 percent retrace from the mid-July high to the August low.