Published June 29, 2018
International and emerging market stocks have displayed disturbing action recently, failing to hold support, giving up a two-year rally, and accelerating a notable downtrend. The chart below highlights the crossover of the 50 and 200-day moving averages. We see on the left side of the chart the circle and line highlighting the prior crossover for emerging markets back in mid-2015. That bout of weakness was fairly brief as the market broadly came out of a correction in early 2016 launching a 2-year run that almost doubled the index.
The current weakness in emerging markets has roots in a strengthening U.S. dollar, rising as U.S. interest rates shift upward. The chart below shows how some of the currencies of emerging market nations have been hit this year. With a substantial amount of debt denominated in U.S. dollars, emerging markets see their balance sheets suffer as the U.S. dollar rises – their interest payments rising as the U.S. dollar rises.
Thankfully, our focus Nasdaq 100 (QQQ) index and its price action has been quite positive so far this year. The Nasdaq 100 (QQQ) holds gains since the beginning of 2017 that are now an outlier to the other markets. Shown below is a comparison of the returns of the Nasdaq 100 (QQQ) to the S&P 500, international and emerging markets, and small-cap Russell 2000. All the market index returns have converged, now that emerging markets have dropped back, while the Nasdaq 100 (QQQ) remains alone at the top of the pack.
Investors continued wrestling with the implications of trade tariff chatter this week. Monday brought a steep -1.4% selloff, with tech shares suffering even more damage. Shares in technology companies have been relatively unfazed by the trade concerns until Monday when the Wall Street Journal reported that the Trump Administration was considering limiting or even banning Chinese investment in certain technology companies. That report was altered and/or refuted by members of the Administration during the day, which did little to ease market fears of an all-out trade war. A lack of any new information Tuesday left investors to react to a surge in oil prices and related shares. The +0.2% rebound was lackluster though. The rebound gained strength to begin Wednesday as further details of how the trade restrictions might be applied on technology alleviated some of the trade concerns. However, the good feeling was short-lived as sellers quickly reasserted control. Financial shares posted their 13th straight losing session on a flattening yield curve while the broad market slid -0.9%. Another rebound effort commenced Thursday on little new information. Amazon (AMZN) announced forays into pharmaceutical distribution and enhancing delivery service, both of which impacted shares in those sectors. However, the +0.6% bounce failed to recapture the prior day’s losses. Stocks kicked higher to start Friday. A European deal on migration, a very contentious issue for the Eurozone, and a report from the Federal Reserve paving the way for most banks to return more money to shareholders, were catalysts for the spurt upward. However, little follow-on buying ultimately led sellers back into the market returning shares to flat on the day, a significant disappointment for the bulls.
Stocks posted a second straight losing week with the S&P 500 (SPY) finding support at 2700 but still down -1.26% for the week. The Nasdaq 100 (QQQ) tumbled -2.09%, though it held at support of 170, a level cleared on the first of June and held above all month. The small-cap Russell 2000 (IWM), a market leader recently, fell a worse -2.41%, though this index too held at a key technical level.
Warm wishes and until next week.