Thursday, October 22, 2015

Recovering Emerging Markets

Just like the Fed, the European Central Bank has the venerable reputation of serving as the monetary and financial giant that keeps global economic engines running. Accompanied by an earnings season that has companies constantly meeting or beating their low expected EPS projections, ECB press releases appeared all the more exciting with Mario Draghi in the spotlight. Investors in this report are looking for signals of the continuation of quantitative easing despite some misgivings about its effectiveness. If it does look like QE will be pushed into the end of the year, European securities should see an increase in price. Sure enough, Draghi's comments gave investors the feeling that more stimulus is needed. Even though comments like that could be taken as a contrarian indicator, traders supported gains caused by the preservation of loose monetary conditions. As the Fed and the ECB continue to coordinate their dovish policies, stock markets have responded positively. The Dow Jones Industrial Average and the S&P 500 show the resumption of the bull rally with gains of about 1.70% and 1.63% respectively. Correction losses from August have almost been reversed as the indices reach continue the push to their yearly highs. European stocks skyrocket with 2% gains shown in Germany, France, Spain, and Italy's indices, and pared gains from the UK leave them at gains of 0.44%. Two economic indicators came out today supporting the upturn that investors traded on today. Unemployment claims fell more than expected in the United States as home sales grew more than the consensus. The labor and housing market are two essential parts of the U.S. economy that represent the health of consumer spending. Bullish sentiment on both ends makes stock market equities and bonds spring forward. Whether this reignition could turn into another bullish surge depends on how long lasting a monetary effect can be with most of the sluggish figures behind us. The U.S. continues to push for a growth rate just above 2.5% and China just below 6.9%. The market seems to want to support that argument that a bullish market is in effect, and investors are using earnings surprises to boost their support for sectors. Tech firms like Alphabet and Amazon revealed earnings surprises that boosted their gains of 2.16% on the day. Even though most of the gains originated in European and U.S. markets, emerging market economies also enjoyed the stimulus reintroduction that will make European goods cheaper and boost asset prices.


In the bond market, sovereign debt bonds in Italy and Germany increased in price dramatically. As yields go down, European nations will be able to fund their debt cheaper and support the stimulus spending that is needed to fight the slowdown. As the Euro weakens on worldwide currency exchanges, the strengthening foreign monies will help supply confidence to net exports in emerging markets. The chart above compares two securities that measure a basket of world economies: in green, the MSCI Emerging Markets Index is compared to, in black, the MSCI World Index Fund. These derivatives track mid-cap and large-cap stocks across different economies depending on the stages of development which characterize them. Although they are not often recognized, emerging market economies are perhaps the most important areas of growth in the world. Their high GDP expansion drives many parts of already industrialized economies.Sectors like industrials, basic materials, and commodity-based firms rely on demand from these voracious economies in order to maintain revenue levels and expand infrastructure. Demand in countries like China, Brazil, and the "Asian tigers" have become vital to superpowers like the United States, Germany, and Britain because of their exceptionally high GDP figures (China's was as high as 10% at one time). Global turmoil this year began in late August with the introduction of Chinese weakness and a week of corrections in the U.S. markets. Billions of dollars left equities and bonds, and emerging markets felt the retreat the most. Further weakness was most likely caused by low oil prices draining profits from oil exporting nations like the Arab states. The rebound in September is shown as a slight nudge forward with retracements just under 50%. Looking at the Emerging Markets Index, we see a significant underperformance as the global fund outpaced them during the month of the rebound. The Chaikin Money Flow indicator also shows marginal amounts of money flowing into the bullish trend that came after the correction. Conditions might have also been hurt by a poor third quarter as well as a stronger dollar making most commodities more expensive to the blossoming new industries looking to take advantage of industrialized help. At the end of Q3, we see another correction in both of these indices which retouched the previous low from the correction, Subsequently, another rebound came about in the bullish month of October. Emerging markets seem to have surged more consistently in the fourth quarter as its growth has almost mirrored that of the world index. Once again, the CMF shows that volume levels support the apparent trend with far more capital moving into emerging markets once again. It is not completely sure that the rebound is solid, but improvements of industrial goods and oil futures on the commodity market has shown a healthier improvement indeed. For investors looking into those sectors (consumer goods and energy) emerging markets are an important indicator of expansion and a bullish market.

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