The Macro View From 30,000 Feet - Part II
Good Morning. Our best guess is that the U.S. stock market is continuing to recover from the "tapering = tightening" freak-out that occurred from 6/19 through 6/24. Some will argue that stocks cannot survive rising rates for long while others (more specifically, those dressed in their horns and hooves) suggest that good economic news is actually a good thing and that rates are rising for the "right reasons."
Personally, I think rates are rising due to "the bond trade" that is currently being unwound in portfolios all over the globe. And I will go so far as to say that this trade is likely to persist for quite some time. This may be the reason that stocks continue to struggle higher. Yes, prices are moving up. But frankly, the advance has hardly been a straight up affair as there have been meaningful bouts of intraday selling in each of the last seven sessions. Thus, I believe the current action suggests that there is some "discussion" going on between our two teams.
Since, I prefer to let price be the final arbiter of any and all stock market "discussions," I thought we would continue our review of the macro themes of the major markets this morning. Last time, we took a look at the U.S. Stock Market, the U.S. Bond Market, the U.S. Economy, and Fed Policy. We concluded that stocks in the United States were clearly in some kind of a bull market; that bonds were likely entering a secular bear market phase; that the economy continues to improve – albeit at a painstakingly slow pace; and that the Fed has a plan to first taper then exit its current stimulative measures.
This morning, we will continue with up our executive summary of the major "global macro" categories by taking a look at some of the foreign markets including Europe, China, and the Emerging Markets. Then in our final segment of this series, we will review Japan, Commodities and Currencies. So, without further ado, let’s get to it.
Europe: The Eurozone continues to be a "good news/bad news" situation. The good news is that the annual crisis that has been playing out across the pond for the last three years seems to have been averted this year. It would appear that the mere suggestion of the ECB's OMT program (which, by the way, is not yet functional) has been enough to quell the rate contagion in the major European countries. And while there continues to be problems in places like Cyprus and Portugal, the crisis does not appear to be affecting global stock markets at this time.
The bad news is that the economies and the stock markets of the Eurozone continue to struggle mightily. While the austerity measures put in place by the 'troika' (EU, ECB, IMF) have helped to quell the crisis, the massive cuts to government spending have meant that the economies of Greece, Spain, Italy, etc. have been plunged into what can only be called a depression. Unemployment rates are at mind boggling levels and the threat of social unrest continues to be a problem.
The chart below of Europe's EMU countries on a weekly basis since late 2008 shows that while markets are off their lows, they are going nowhere fast. Therefore, we believe that the majority of the Eurozone continues to be uninvestable from a fundamental standpoint. However, there are opportunities from time to time for those nimble traders who can get in when the uptrends develop and then get out when the next problem arises. In addition, places like Switzerland (EWL) and the Netherlands (EWN) are in decent shape and can be owned. But the Bottom Line is: We'd continue to steer clear of the Eurozone region for now.
iShares EMU ETF - Weekly
China: China is the world's second biggest economy behind the United States. However, in terms of importance to the world economy, China may be the most important economy on the planet.
The key to the Chinese market right now is the now-obvious slowdown in the country's rate of growth. While a growth rate north of 7% may sound like an enviable number to the major economies of the world (U.S. GDP is expected to come in somewhere in the 2% to 2.5% range this year), this is down sharply from previous levels. It is for this reason that the stock market is having a very difficult time in 2013. For example, the iShares China 25 Index (FXI) is down -20.7% as of 7/5/13.
iShares China 25 Index ETF - Weekly
The chart above, which is the FXI weekly since late 2008, paints the picture nicely. In effect, the chart is saying that investors in China are no better off than they were in early 2009. In other words, while there has been opportunities for traders to ride the trends, long-term investors have nothing to show for the last four years.
The wild card for China investors is the fact that the country is centrally planned by the government. Currently the powers that be in China are saying that the target for economic growth is in the 7% to 7.5% range. Since this rate is considerably below recent levels, investors have been looking for the PBOC (People's Bank of China) to take stimulative measures such as a reduction in interest rates. However, the Chinese central bankers have been reluctant to take action for fear of creating/extending bubbles in real estate and banking. The Bottom Line: Until the PBOC decides to take stimulative measures, China is in the "avoid" category.
Emerging Markets: We could take the easy way out and say that as China goes, so goes the emerging markets. However, there is more to it than that. It is true that China plays an important role in the fate of the emerging markets and is likely a major reason that the EEM is down -15.8% year-to-date as of 7/5/13. Yet, to get a true picture of what is going on the emerging markets world you need to look beyond growth rates (which are falling across the board in places like India and Brazil) and take a peek at interest rates, currencies, and commodities.
As the chart below illustrates, the key here is none of the above is going in the right direction for emerging markets investors. Growth rates are falling. Interest rates around the globe - but especially in the U.S. - are rising. The U.S. dollar is getting stronger. And prices of commodities, which are major exports of many emerging market countries, are falling. So, while places like Thailand (THD), Indonesia (IDX), and the Philippines (EPHE) had held up better than the major emerging markets such as Brazil (EWZ), Russia (RSX), India (EPI), and China, until just recently the bottom line is that rising rates and falling commodity prices are bad for emerging markets. Thus, we would continue to avoid this area.
iShares Emerging Markets ETF - Weekly
Next time, we will conclude our global macro outlook series by taking an executive summary look at Japan, commodities and currencies.
Turning to this morning... Alcoa kicked off earnings season with a modest beat, China's report on CPI was viewed as a positive, and word that Greece will indeed receive the next tranche of bailout funding has been enough to send the majority of the foreign markets (save Italy and Spain) as well as the U.S. futures higher in the early going. However, the futures here at home do seem to be mirroring Europe's every move.
Positions in stocks mentioned: none
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