The Daily Trading Report

The weakness in equities and commodities has not been supported by weakness in risky areas of other asset classes. High yield corporate bonds, emerging market debt and emerging market currencies remain only a few percent away from multi-week highs and well above support levels. Furthermore, the USD Index and US Treasuries hardly moved on Thursday. This behavior is certainly not characteristic of the beginning of another tradable bearish phase in risky assets……usually at the mere sign of equity or commodity markets catching a cough, junk grade bonds, emerging market debt and emerging market currencies are already in bed with a fever! Until there is confirmation across all asset classes of a move away from “risk taking” we see the current behavior of world financial markets as a “risk taking consolidation” phase rather than the start of a risk aversion phase. Accordingly we believe that the downside in equities should be limited.

Could equities lead emerging mkt debt, high yield debt, and emerging market currencies into a significant (tradable) bearish phase? If they did it would be a first. In all the analysis we have done (and that goes back to pre 1987) we have never seen the developed equity markets lead risky debt and currency markets into falls of significance.

Equities As far as the major market indices go there has yet to be a breach of “support levels. Both the Vanguard Total Market (VTI) and the MSCI Emerging Market (EEM) indices have not confirmed a lower low. Granted the formation of the VTI is not so charming from a bullish perspective but until otherwise confirmed we have to stick to a bullish view. We cannot rush for the hills just because there has been 6% downside in world equity markets.

A bullish view on world equity markets is supported by the behavior of small caps and the NYSE Advance Decline line. Typically before a bearish phase begins there will be a breakdown in market internals. The general reluctance of broad market indicators go follow the behavior of the major market indices is an indication of the underlying bullish tone of the market.

Fixed Income
From experience we know that emerging market debt and high yield debt are highly sensitive to risk aversion. Currently the Vanguard Total Market index (VTI) is 6.9% below its multi-week high but high yield debt and emerging market debt indices are less than 2% away from multi-week highs. Furthermore, US Treasuries continue to look as though they are laboring. If we did know any better by looking at the behavior of the world treasury market it would look as though there is absolutely no risk to the “high yield trade falling over”!

Commodities The weakness in the broad based CRB CCI index (equally weighted index of the 17 most actively traded commodities) has fallen reasonably hard from its high on June 1^st however its remains above its support level. It is encouraging to see the most economically sensitive area of the commodity group, base metals, remaining strong and well above the nearest level of support.

Currencies If the USD Index is moving to a bullish phase it is certainly not showing its intentions very well! With the emerging market currency ETF “CEW” only 0.71% away from a multi-week high this behavior is certainly not bullish for the USD and suggests that the yield trade from a currency perspective at least is still strong.