Emerging Market Weakness Affecting All Asset Classes

By Tim Thielen  FEB 03, 2014 9:05 AM

The media's sudden focus on the concerns from overseas has arrived too late for many investors.

 


The correction in risk assets that began the week before last continues. The fact that this correction is a bit more intense and seemingly continuing longer than other recent pullbacks has captured the attention of the financial media. In their search for culprits / causes (because it can't just be that the equity markets were overbought and due for a correction), the talking heads seem to be pointing to burgeoning emerging market weakness as the weight around the neck of the market. I actually have no problem with that conclusion as the chart of my favorite emerging market "tell," the MSCI Emerging Markets Index ETF (NYSEARCA:EEM), has been conspicuously weak for months now. The frustrating part of the media's sudden focus on emerging markets' issues is that they are only just now talking about them, when for many it's too late to have taken loss prevention / hedging measures.

Today, I thought it worthwhile to discuss not only what's happening in bonds and currencies, but to also discuss the domino effects that are being seen in stocks and commodities as well.

COMMODITIES

EM concerns weighing on commodities -- selectively.

The clear acceleration in weakness in the emerging markets -- and especially China -- poses a perception problem for commodities in terms of the demand situation in those markets. Over the last two weeks, while the EM concerns are clearly taking their toll on copper futures, they have not yet pulled down crude oil prices. What can we conclude from that divergence? The answer is unclear thus far, but much more of that action would have us thinking geopolitical problems may be percolating in the Middle East and thus propping up crude oil despite the EM drag.

Elsewhere in commodity land, gold and silver have stopped any bullish behavior that was previously on display in reaction to the falling US Dollar Index. Gold has turned neutral while silver looks just awful technically -- both at least in part due to the sudden strength in the DXY over the last few sessions. What I find interesting in the DXY / precious metals relationship is that we recently saw how silver refused to rally even with the DXY under pressure. Then, we saw an even uglier version of silver when the DXY turned higher in the last few sessions. In my view, the only reason it's not worse is that the DXY's move is obviously related to foreign currency movements and not to US rates being on the rise (they're falling, in fact). Here's something to ponder: What's going to happen to silver and gold when both rates and the DXY turn higher? Frankly, I believe it could get ugly in a hurry!


Click to enlarge

Silver is shown in the chart above. Notice that it appears to be in wave "v of 5 of (3)" lower with a downside target of 17.729 -- although some horizontal support from June's low of 18.264 could spur on some buying short term. That, my friends, is still plenty of room to the downside if you're involved in silver futures contracts.

CURRENCIES

DXY lifting despite Treasury yields' recent decline -- likely due to euro weakness.

The US Dollar Index has been on a massive rip higher over the last several sessions -- and it's certainly not due to some spike in US rates. Rather, it appears to be burgeoning concerns about not only emerging markets but Europe as well.

The chart below shows the DXY and how much upside it could still have in store from a purely technical perspective. I'm seeing a move up to at least 81.93 and possibly up to the 82.74 - 83.24 range if this is a primary move higher. That can't be good for the precious metals complex, can it?


Click to enlarge

STOCKS

S&P 500 (INDEXSP:.INX) futures may bounce soon, but appear to have more downside in the near future.

Last week brought more of the short-term downside corrective action that began the week before. The long-term picture for equities still looks technically bullish. However, the short term should continue to be challenging.

Right now, my expected floor for the S&P e-Mini Futures is 1756.92. At that point, we can see a bounce taking the "minis" up to the 1806.25 to 1819 range.

I would be willing to take a long-side trade once the "minis" test 1756.92 with a stop on any close below 1,755. The target on that trade will be 1806.

If you're not willing to play the long side, you should wait until such a rally occurs to initiate shorts -- preferrably closer to 1819 with a stop on any close above 1821. The downside trading target on that will be 1735.


Click to enlarge

OVERALL

As noted in the intro today, things may remain dicey overall -- short-term corrections not withstanding -- for a while longer. The macro bull market for stocks appears to still be intact, however, and any further ventures into massively oversold conditions in the market should be treated as buying opportunities until the long-term trends are broken.

Twitter: @seachangereport

No positions in stocks mentioned.

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