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Back in October, we wrote an Asset Management piece highlighting the relative strength of the Mexico and Canada Index ETFs as those two countries were on the cusp of negotiating a trade deal with the U.S. The markets knew it before it happened, and investors bought into those two foreign stock ETFs in advance of the announcement. They rallied nicely.
Today, the China trade deal is getting lots of media print and investors’ mind share. There is a possible similar foreshadowing taking place in the market right now, as for the first time in 2018 emerging markets are now outperforming U.S. markets.
In the chart below, the green line shows the iShares MSCI Emerging Markets ETF (EEM) relative to the SPDR S&P 500 ETF (SPY). We can see that the green line is positively sloped, showing the relative strength of emerging markets versus U.S. markets. China comprises approximately 30% of the weight in emerging markets, which means China has a large impact on emerging market indices performance.
The conclusion that can be drawn from the strength in emerging markets relative to U.S. market is that the market, where people voice their opinions via capital and not ink, is showing green shoots about the prospects for a trade deal. The two other lines in the chart are a 12-day (blue line) and 48-day (orange line) exponential moving average for the EEM/SPY relative strength line (green line). Both moving averages are positively sloped, further indicating the strength of emerging markets relative to the U.S. market. Also, the faster moving average (blue line) has crossed the slower moving average (orange line) further indicating emerging markets are trending upwards relative to the U.S. market.
This bodes well for the higher possibility of a completed U.S.-China trade deal, which should help bolster both emerging markets and the U.S. market.Download PDF
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