Global equity markets are showing weakness. A possible change in trend is in progress. Over the past few decades 2 year moving average proved to be a good indicator for following long-term trends. Price is now below the long-term average and as long as it remains below this technical level probability of further correction in equity markets will increase. 407 level will remain as strong resistance.
It started with weakness in emerging market currencies (archive for emerging market currencies) then it spread to equity markets and now emerging market yields are under pressure. From commodity exporting economies to energy importers, almost all emerging markets experienced high volatility. Charts are telling us that the high volatility is here to stay and possibly spread to other investment areas. This update shows the technical damage on the 3 major emerging market economies; Brazil, South Africa and Turkey. By looking at these charts one would wonder how much more shocks can these markets absorb. It looks like the bond markets can experience some heat in the following months.
Sharp sell-off in Brazilian equities breaks down 2008 low levels. MSCI Brazil underperforms the MSCI Emerging Markets index.
U.S. Dollar vs. Brazilian Real is now close to 4 levels. Since the breakout above 2.62 levels, depreciation in Brazilian Real has taken a parabolic shape. Breakout above 4 levels will push the cross rate to uncharted territory.
10 year government bond yields completed 7 year-long base formation, suggesting a price target of 18 levels.
MSCI South Africa is now testing strong support at 445 levels. Breakdown below this level can push the index towards 350 levels.
MSCI South Africa has outperformed the MSCI Emerging Markets index. This is positive on a relative basis.
U.S. Dollar vs. South African Rand is now challenging all-time high levels. Depreciation against the U.S. dollar resumes…
South Africa 10 year government bond yields are completing a massive 5 year-long base formation. Breakout above 8.9 levels can result in a similar move that we have seen on the Brazilian government bond yields.
MSCI Turkey breaks down decade-long trend line support. Also the index breached the 5 year-long support at 400 levels.
If we take the relative performance of MSCI Turkey vs. MSCI Emerging Markets we can conclude that the index have been flat since 2004!
After completing its decade-long consolidation which took the form of a continuation head and shoulder U.S. Dollar/Turkish Lira broke out above 1.8 levels and since then the sharp depreciation pushed the Lira to historical high levels. Added to the emerging market weakness, political uncertainty and security issues put further pressure on Turkish economy and its financial markets.
Turkish short-term yields are completing a massive 6 year-long base formation. Breakout above 11.8 levels can push the yields to 19 levels in the following months.
CBOE Volatility index moves into a new territory of high volatility. Usually high volatility periods suggest corrections in equity markets. In the past several decades breakouts above 20 levels on the VIX was followed by major equity market corrections.
Chart shows CBOE Volatility Index with weekly closing prices. Last week of August the VIX closed at 26.05 levels which was clearly above strong resistance at 22. Last few weeks surge in volatility cleared two important technical levels. Both the 7 year-long downward sloping trend line and the horizontal resistance at 22 levels were broken on the upside, suggesting a change in trend.
Unless we see a sharp reversal below 22 levels, following weeks/months will lead to higher volatility levels and further weakness in global equity markets.
*Chart shows updated current price as of 1/9/2015 EST 12:30 PM
U.S. dollar strength is here to stay. Greenback had a strong recovery last week. Strong dollar will continue to put pressure on commodities, commodity currencies and also emerging markets. In other words, weak emerging markets, commodities and strong U.S. Dollar trend is likely to continue in the following months.
After its breakout from a decade-long consolidation in the last quarter of 2014, U.S. Dollar index rallied from 85 to 100 levels. Since March 2015, price has been pulling back to the strong support at 92 levels. Last week, the dollar index tested the strong support and rebounded sharply. Latest consolidation is more like a counter trend move in the context of a short/medium-term correction. Uptrend in the U.S. Dollar remains intact and once the choppy sideways consolidation is over we can expect the continuation of the uptrend.
MAJOR U.S. DOLLAR CROSS RATES
Couple of reasons why I think emerging markets sell-off is likely to continue in the coming months. I’ve updated this chart and discussed EM equity and currency weakness over the past year. Earlier updates here
- Volatility which is calculated by the Bollinger Band Width is just turning upwards from an extreme low level. There is still room for volatility to expand.
- Long monthly price bar has clearly broken below the lower Bollinger band.
- 4 year-long sideways consolidation has recently broken on the downside.
Latest outlook on the MSCI ALL COUNTRIES WORLD INDEX suggest there is a change in trend. We need to watch out for further volatility and possibly deeper corrections.