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Emerging Markets Break Out

David Becker
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www.iforex.com

Emerging market shares hit 3-year highs after breaking out. Just over a month ago, the EEM broke above its late 2012 high near 44.00. That bullish breakout bodes well for emerging market assets.

Their longer-range chart pattern also looks bullish.

The daily price action shows that the EEM has broken to new highs. The weekly bars for the Emerging Market iShares have been trading sideways since 2007 in a huge consolidation formation. The recent upside breakout has put the EEM in position to challenge a resistance line drawn over its 2007/2011 highs. The EEMEFA ratio has been rising during 2014 for the first time in three years. That means that emerging markets are starting to do better than foreign developed markets. They are also doing better than the U.S. The EEM has gained 9.6% this year versus an 8.2% gain in the S&P 500 and a much smaller gain of 2.4% by EAFE iShares.

The the Wisdom Tree Emerging Currency Fund (CEW) has been rising since the start of year. The CEW gain of 1.9% during 2014 has lagged behind a 3% gain for the U.S. Dollar. Emerging market currencies, however, have done better than the Japanese yen (1.2%), the British Pound (-0.10%), the Canadian Dollar (-3%), and the Euro (-4.2%) during the first eight months of the year. Part of the reason for the inflows into emerging market assets has been historically low interest rates in developed markets, especially Europe and Japan. Some of that money has found its way into the U.S. whose rates are slightly higher. It seems, however, that a lot of the funds flowing out of Europe and Japan have moved into emerging market stocks and bonds in the search for higher yield. The biggest relative gains in emerging market currency gains have come against the falling Euro.

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