Emerging Markets and Commodities
The week after rate delays, markets continue their sideways movement through the end of Friday. The Dow Jones Industrial Average closes today with a 0.70% gain making the week total a -2.16% loss. Fluctuations today stayed within a range of 260 points similar to previous trading days throughout the week. The S&P 500 showed similarly dampened movements as it lost a small -0.05% with its weekly change reported being -2.96%. The common volatility indicator VIX grew a little today after Janet Yellen extended her concerns for foreign and domestic growth.On a side note, the health sector bogged down the rest of the market as it saw significant losses after Hillary Clinton's comments concerning prescription price caps. Their -2.59% sector loss was significantly lower than the rest of the advancing industries. The energy sector remained directionless today as crude oil prices gained just below one percent on the New York Mercantile Exchange. A lot of analysts around the economics sphere have launched into calculation mode with a multitude of analysis reports touting the next market moves based on the recent Fed moves. A period like this would see an increase in the amount of projections made as financial news outlets have posted various peaks into the proverbial crystal ball. Meanwhile, lateral movements leave a dearth of excitement on which to be reported. Think of it as a marketwide continuation trend in which investors are contemplating their next moves. I find myself in a similar pickle as muted movements leave little explanation for current market conditions, but lend themselves to clairvoyants looking to guess the next move. For trends, many investors are looking at emerging markets as well as the Fed Chairwoman as she mentioned those fledgling economies in her review of the interest rate decision. Many articles have referenced the MSCI Emerging Markets Index which lost almost thirty points this week.
|Emerging Markets Index, MSCI.com|
As seen by the graph, declines began in May 2015 after increases earlier in the year when rate increases were projected later this year by the Fed. Countries like Brazil and India are experiencing severe weakening of the currencies on which their economies run. Growth rates are slowing down to levels which reflect an information economy (around 3% or lower). The weakness of those nubile economies is scaring money from where it is needed most. Public spending, instead, is replacing the private capital that used to be heavily bet on explosive growth coming out of the last years of the financial crisis. Some are blaming that on fundamental weakness. Others point the finger at Yellen's lamentations of global economic health where she cited emerging markets as proving unwieldy based on international growth standards. But she isn't completely baseless. Emerging market economies have been stretching their balance sheets creating more risk on their sovereign debt. Weakening exchange rates are hurting their ability to fund important projects especially those supported by U.S. multinational companies. As rates are projected to come later this year, global investors are abandoning risky debt for U.S. treasuries that are sure to be more valuable after an interest rate followthrough. Instability accentuated by bearish stock market trends could create an atmosphere where capital seems scarce (though contrarian analysis would say otherwise). As much as U.S. investors would like to separate themselves from the anxiety in emerging market economies, they can't, especially when we look at where a lot of global demand will come from in the future.
In the charts above, we have a comparison between the S&P Energy Index and the SPDR MSCI Emerging Markets ETF linked to the index I showed above. They are representative of the U.S. energy sector and emerging market performance respectively, Looking at trends, the two indices seem to follow each other in the same general long-term direction with major gains last year before the oil slump and a general downtrend when it actually occurred. The period I'd like to focus on beyond the blue line seems to be a mirror image. Some might even call EMFT the S&P Energy's doppelganger if they didn't know any labels. Taking away from this chart, investors shouldn't think to correlate these indices directly because there are some deviations; instead, they might want to think what's behind the graph. The truth is that emerging market economies provide a lot of substantial demand for commodities, especially crude oil and other energy products. China, one of the largest emerging markets in the 20th and the 21st century has driven global oil demand growth for years. Demand from India, Brazil, bustling African countries and booming Asian economies will drive the growth that will mitigate the supply glut. On top of that, resource economies attempting to grow their service sectors (typically a telltale sign of economic well-being) will decrease their dependencies on "cash crops" like crude oil, timber, and gold. The first step out of raw material dependence is diversification. With bearish markets in emerging nations, the commodity traders in the United States might see further losses extended on the already dismal performance from the futures exchange. We've already seen commodity prices drop from a strong dollar, but weaker foreign currencies have the same effect on consumption outside of the U.S. nation. By Q3, revenue forecasts for multinational companies could be hurt by these prospects. Going forward into the back end of 2015, investors should stay aware of those growing economies as they can play a big part in commodities and equities markets with the intense amount of capitals needed to maintain high growth rates.