If everything is so fine with the economic recovery in both America and the global economy, then why are the emerging markets failing to rebound? It seems somewhat odd how the global economy could be fine when its key trading partners in the emerging markets are not.
You all know how much I like the emerging markets longer-term. (Read “Think Global for the Best Investment Opportunities.”) However, the short- to mid-term is another story, as there’s clearly some stalling.
The HSBC Emerging Markets Index (EMI) declined to a contractionary 49.4 reading in July, versus an expansionary 50.6 in June. This was the first contraction reading since 2009.
The HSBC reading is also a red flag to the stock market that, as I have been saying in recent commentaries, is showing some cracks in its foundation.
If the U.S., Europe, and China are fine, then the emerging markets should be too—but they’re not fine, so you should be wary of this. A pickup in the emerging markets is needed to get the ball rolling on economic growth.
As shown on the iShares MSCI Emerging Markets (NYSEArca/EEM) exchange-traded fund (ETF), the emerging markets have been under some duress since peaking in May, based on my technical analysis.
Chart courtesy of www.StockCharts.com
Here’s what’s happening at this juncture:
GDP growth in China has stalled, holding above seven percent. The manufacturing sector may be contracting, that is if you believe the HSBC estimate over the official estimate from Beijing, which says manufacturing is expanding.
Then you have the dismal state of affairs in the eurozone and Europe. Six of the 17 eurozone countries are gripped in a recession with high unemployment. You have Greece running on fumes with a potential turnaround still decades away. Spain needs money, and so does Italy. The problem is that the global demand for European goods simply just isn’t there.
Latin America has seen its growth slowed a bit. The concern with places like Brazil is the inflationary pressures and the currency strength.
Finally, you have good old America, with nearly $17.0 trillion in national debt and an inability to resolve the matter in Congress. The easy monetary policy has also created a massive debt level that will only continue to rise and face higher interest rates down the road.
Of course, all of these issues will have an impact on the U.S. economy and the stock market.
Now, do you still believe America and rest of the world are doing fine?