International Markets in Turmoil – Part 2

Summary:

  • The German equity market is in a downtrend with negative impact for Europe
  • The bear market in natural resources continues to pressure Latin American and Asian markets
  • In our opinion, international markets will continue to decline and should be avoided in the near term

In our June blog post we warned about the rise of geopolitical risks and their impact on international markets. In the summer, one of the main concerns was the potential exit of Greece from the Euro Zone. While the exit did not happen, the continued weakness of the Greek equity market (GREK) shows that Greece is not yet in a better shape than before, and it is likely that the question will have to be addressed again in 2016.

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Our current concern is the weakness of the German market, which is the largest and strongest economy of Europe. To illustrate the concern, lets take a look at two German bellwether stocks, Volkswagen (VLKAY) and Deutsche Bank (DB).

The chart below shows that the highly publicized “Dieselgate” emissions scandal has caused a more than 50% drop for the Volkswagen stock so far. With litigations just starting up and the recall for the diesel cars still not available, we see the weakness to continue for the near term. The chart of Deutsche Bank is also very bearish with a recent technical breakdown below the support level.

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The chart of the German equity market shows a similar negative pattern:

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Besides the weakness of the German market, Europe has two additional problems that will have to be resolved before we can turn bullish again. The first is the concern about the effectiveness of the quantitative easing program with the ECB starting to hint again at the need for a new round of money printing. The second concern is the economic impact of the flood of immigrants and the political tensions it created in the Euro Zone.

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Our second topic is the impact of the bear market in natural resources, such as oil, on emerging markets that are net exporters of raw materials. The chart of the Fidelity Natural Resources Fund (FNARX) shows that the bear market resumed in late summer and downside volatility is very high:

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It is not surprising to see that equity markets in Latin America and in Asia are also in a steep decline:

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International Markets in Turmoil

Geopolitical risks are on the rise again with weakness in European markets due to the intense negotiations around the potential exit of Greece from the European monetary union. The negative performance of the Greek stock market reflects the uncertainty about the outcome of the negotiations:

grek

In addition to Greece, the sudden and dramatic selloff of Chinese stocks has the potential to destabilize international markets. A-shares, which are traded in Mainland China at the Shanghai and the Shenzhen Stock Exchanges, are impacted the most, while shares in Hong Kong are holding up relatively well:

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As the result, most Fidelity mutual funds that invest in international markets are no longer trending higher. Examples include the Southeast Asia Fund (FSEAX), the Emerging Markets Fund (FEMKX) and the Diversified International Fund (FDIVX):

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In our previous article we wrote about the potential of the natural resources sector to further rally and to provide market-leading results in 2015. Unfortunately the selloff in the Chinese market, which is a major consumer of commodities, caused an unexpected reversal. The chart of the Select Natural Resources Fund (FNARX) shows the sudden reversal of the emerging bullish trend:

fnarx

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Stock Market Correction: Own the Best Fidelity Funds to Avoid Volatility

Stock market volatility continued today, with the S&P 500 index and all other major U.S. equity indexes either approaching correction territory or already in it. The increase of the volume during the sell-off is disconcerting and may indicate deleveraging by large hedge funds and institutional investors.

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As the equity market correction has been unfolding, in previous articles I have highlighted the “falling knives”, the investment areas that prudent investors should avoid. The two weakest investment areas continue to be Euro stocks and energy/natural resources sectors.

Relentless selling has caused tremendous drops already. Consequently, I would not be surprised to see a violent relief rally taking place in these highly oversold markets in the near future.

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While equity markets experience their first serious disruption since the panic of the August 2011 credit-rating downgrade of the U.S. debt, it is worth taking a look at other financial markets, as well.

Most notably, and unexpectedly, interest rates of the long-term Treasury bonds continue to decline rapidly. Paradoxically, as the Federal Reserve has tapered off its bond-buying program, demand has increased for U.S. Treasury bonds, pushing the yield lower. However, this effect is exacerbated by increased reserve requirements for banks and, more recently, the “flight to quality” due to the equity market correction.

Nonetheless, since financial markets often forecast economic conditions 12 to 18 months into the future, the rapidly declining interest rate of long-term Treasuries is probably not a good sign and may signal that the bond market is anticipating economic contraction in 2015 and beyond.

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One of the confounding factors of market action has been the rapid rise of the dollar against all major currencies from August through October. Many commentators have attributed changes in the market to the strengthening of the dollar, however, since the beginning October, the dollar has pulled back and no longer appears to play a key role in determining stock market dynamics. A further weakening of the dollar from these levels could potentially help U.S. multinational companies to report improved earnings in early 2015.

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Commodities, as a group, have experienced a huge deflation since July. Energy and metals are the weakest, while some agricultural commodities are showing signs of bottoming out.

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Perhaps the only silver lining in the commodities space right now is silver, and of course gold, as these two metals are highly correlated. After a devastating decline staring in September 2011, gold bullion bottomed out in July 2013 and has been in a wide trading range ever since.

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I’d like to highlight here two conservative investments, which have worked well throughout 2014, regardless of market volatility. The first one is the Fidelity U.S. Bond Portfolio (FBIDX). FBIDX is a highly diversified bond fund that is appropriate for conservative investors.

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My top pick for the current market environment is the Fidelity Spartan Municipal Income Fund (FHIGX). Its low volatility and a tax-equivalent 3.55% yield continues to make FHIGX a very attractive investment choice.

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A word of caution for bond investors: unfortunately, not all bond funds have done well since the market correction started. High-yielding corporate bonds tend to track the stock market trends more closely than the interest rate trends, and are in a decline now.

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European Markets in Downtrend

Both weakening economic conditions outside of the U.S. and geopolitical risks have caused the dollar to strengthen against all major currencies since May, including the Euro:

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The weak Euro coupled with renewed fears about recession in the Eurozone have negatively impacted European equities. Prudent investors may want to avoid investing in European equity markets until the downtrend reverses.

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Emerging Markets in Downtrend

Weakening growth in international markets, the strengthening dollar and the prospect of higher interest rates in the U.S. negatively impacted emerging markets in September. The chart of the Fidelity Emerging Markets Fund (FEMKX) below shows that after a brief rally in August, the bullish trend sharply reversed and FEMKX is now in a bearish downtrend.

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Fidelity has several funds that allow investors to make region-specific bets in emerging markets. The comparison of these regional funds show that the Latin America Fund (FLATX) and the Emerging Europe, Middle East and Africa Fund (FEMEX) are the weakest, while the Southeast Asia Fund (FSEAX) has held up better:

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Buy and sell signals for Fidelity funds are available at FidelitySignal.com

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The Fidelity China Region Fund and the Spartan Long Term Treasury Bond Fund Show the Best Relative Strength in the Aftermath of the Market Sell Off

Yesterday, the sharp stock market sell off spooked many investors. Several equity sectors were down more than 2% and the selling was broad-based. The cause of the sell off was a combination of mixed signals about the U.S. economy and the increase of geopolitical risks in Argentina, the Ukraine and the Middle East.

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While equities closed lower again today, the late afternoon rally increased the likelihood of the return of a more stable market next week. The Fidelity China Region Fund (FHKCX) held up the best during the sell off and may continue to do so should the equity sell of resume in September. The FHKCX chart shows that the strong bullish trend is still intact and the relative strength vs. the S&P 500 continued to increase during the sell off.

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Treasury bonds often serve as safe haven in volatile markets. It is widely expected that interest rates will rise in the near future, which should cause the price of long-term Treasury bonds to fall, not to rise. Consequently, a continued bull market for Treasuries may serve as a cautionary signal for equity investors (see Spartan Long Term Treasury Bond Fund chart below). Also, we are approaching the seasonally weak September-November period when most of the market crashes occurred. Taken together, the market action should caution investors to steer away from high risk investments until conditions stabilize.

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Buy and sell signals for Fidelity funds are available at FidelitySignal.com

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Select Materials Fund Shows Negative Relative Strength

The stock market sell off yesterday caused all Fidelity select sector funds to decline. As we approach the often volatile fall season we are not surprised to see investors reducing “risk on” investments. To identify the weakest sectors we use relative strength that measures the performance of a given investment compared to the S&P 500 index.

One of the weakest Fidelity funds based on this measure is the Select Materials Portfolio (FSDPX). The top panel of the FSDPX chart below shows that the relative strength is declining at an accelerated pace (see blue line). This suggests that the net asset value of FSDPX can decline more rapidly than the equity market in case of a continued sell off.

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Buy and sell signals for Fidelity funds are available at FidelitySignal.com

 

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