Friday, March 21, 2014

China, Russia still presents a risk for investors

The following graph of the iShares China Large-Cap ETF (FXI), our favorite proxy for China’s stock market, is still hanging on by a thread above its recent lows.  A close decisively beneath the 33.00 level for FXI would likely roil global stock markets just as the previous decline in FXI did in January.  It will be well worth keeping an eye on FXI in the upcoming days.

Speaking of China, it’s worth noting that Goldman Sachs Group has warned that financing arrangements in China using commodities to obtain credit may unwind in the next 12 to 24 months.  The unwinding would likely be driven by increased volatility in the yuan currency, according to Goldman.  The unwinding would be bearish “given relatively limited physical liquidity to absorb the shock,” Goldman’s chief commodities analyst Jeffrey Currie wrote. 

It will also be important to monitor the Russia ETF (RSX) in the period between now and April 4.  As you can see here, RSX (our Russia proxy) still hasn’t confirmed an immediate-term bottom as it hasn’t yet closed two days higher above its 15-day moving average.  RSX was down 3.53% on Wednesday as the initial euphoria over the past weekend’s Crimea vote subsides. 

Contrary to Wall Street’s expectations, global market volatility is still a prime consideration for stocks in the intermediate-term.  China’s slowing economy may come to exert a significant drag on global equities as the year progresses, and Russia will remain the proverbial powder keg until the Crimean situation has been fully resolved.  Until then, investors are advised to fasten their seatbelts as there will likely be increasing turbulence in the coming months. 

[Excerpted from the Mar. 19 issue of MomentumStrategies Report]