Although speculation and waiting are still the name of the game in both Europe and the U.S., China is feeling the pain now. Its exports have weakened and its equity markets are in decline. The chart below shows Chinese equities (FXI) underperforming World Indexes (VT) for upwards of three years. This indicator has seen great resistance for years due to the perceived risk of Chinese equities, as well as the fear of a hard landing for its broader economy.
With lowered inflation and the fear of what global weakness could bring, look for China to turn toward easing soon. The country has been quick on the trigger over the past few years. Whether in the form of interest ratecuts, a cut of the reserve ratio, or stimulus in the form of spending, expansionary moves look to aid assets with a vested interest.
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Copper looks to find a bid in this instance, but the Aussie dollar (FXA) vs. yen (FXY) trade could work as well. This pair has been on the rise for months, but overhead resistance is evident. The MACD indicator has narrowed to potential breakout proportions. Given the weakness of Chinese equities and the point of resistance in the Aussie/yen, impending stimulus measures could again give the needed boost to assets with vested interests in China.
On the bond front, the spread between the Treasury short-dated bills (BIL) and the long-dated bonds (TLT) has reached a short-term tipping point. Room for an upward move is possible, but in the short term a pullback looks probable. The waiting game continues in financial markets, and treasuries as a whole are oversold. A tightening of the spread, due to consolidation/pullback, is an obvious move in the near future.
Turning to the bearish indicator, utility stocks (XLU) have failed to meaningfully break lower vs. the broader market of late. The ratio has been in a general decline, but a convicted break lower would lend strong support to an equities rally. Although a defensive rally is a rally nonetheless, real belief in the economy means less risk aversion.
Although European officials have come out and shown consistent support for the euro project over the past few weeks, markets remain on edge about a solution. Treating an insolvency problem as a liquidity problem is one thing, but refusing to treat the problem is quite different. Spanish (EWP) and Italian (EWI) equities vs. the world market index have each, respectively, had a nice run recently. But more conviction is needed to bring it over the top. Much like the other indicators in this article, Italy and Spain have reached upward resistance. Both of these indicators correlate strongly to U.S. equity markets, and a resolution to their problems is essential in prolonging a bull market.
The last indicator of importance is U.S. financials (XLF) vs. S&P 500 equal weight index (RSP). This ratio has entered into an extreme consolidation the past few months. Both the price action and MACD indicator are oscillating within a very narrow range. The waiting game among various global factors -- ECB, Fed, and China -- have led to financials sitting tight. A decisive move within the macro picture should provide this ratio some direction.
