From the Desk of Ian Culley @IanCulley
International credit spreads are contracting.
Investors are running from imminent global collapse by reaching for emerging market bonds over risk-free US Treasuries.
Wait, perhaps I heard it wrong.
It could have been a US economic collapse.
Or was it the Chinese yuan replacing the US dollar as the world’s reserve currency?
Honestly, I don’t pay much attention to the doom and gloom. (But I do find it amusing.)
I’m not the only one ignoring the bad vibes.
The markets are also disregarding the fear mongers…
Check out the Emerging Bond ETF (EMB) versus the US Treasuries ETF (IEF) ratio overlaid with the S&P 500 ETF (SPY):
These two lines follow a similar path – a path currently driven by burgeoning risk appetite.
Investors prefer riskier EM bonds over their safer US counterparts as the EMB/IEF ratio prints fresh highs. So it isn’t surprising those risk-on attitudes are spilling over into the S&P 500 $SPY.
It’s not only EM bonds and US equities catching higher. Emerging market stocks are also completing bearish-to-bullish reversals.
The Argentina ETF $ARGT presents an excellent example:
ARGT is sticking an upside resolution after completing a five-year base in January. The path of least resistance leads higher toward 53 as long as it trades above 38.
Remember, base breakouts in Emerging Markets occur during bull markets. In fact, ARGT posted new all-time highs earlier this week.
I hope the bears take time to digest that one.
Here’s another bullish reversal in the Vietnam ETF $VNM:
VNM is breaking out of a more tactical basing pattern (seven months versus five years for ARGT). But it’s still constructive, especially as the 14-day RSI registers its highest momentum reading in two years.
Uptrends have to start somewhere.
I like VNM long toward 16, but only if it holds above 13.
Argentina and Vietnam are only two examples of the growing participation worldwide. Whether breadth begins to expand among US equities remains unseen, though the recent jump in small-caps and industrial stocks bodes well.
Nevertheless, breadth is improving on a global scale – especially in Emerging Markets. It’s difficult to draw a negative outlook for US equities when strength from cyclical-heavy EM ETFs suggests a healthy rotation on the horizon.
I wonder how the doom-and-gloomers are going to spin that one?
Countdown to FOMC
The bond market is pricing in a pause in the hiking cycle at this month’s meeting.
Here are the target rate probabilities based on fed funds futures:
Click the table to enlarge the view.
Thanks for reading. As always, be sure to download this week’s Bond Report!