EUR 95.47 For Business Accounts Only

Int'l Macro Vision: Sector Synopsis

Int'l Equity Strategy



In our October 1 Int'l Compass we highlighted our belief that the lows were in place for this recent correction and that, combined with mostly healthy market dynamics, a bullish outlook is appropriate if the MSCI ACWI (ACWI-US) is above $77 support and, if the MSCI EM (EEM-US) is above $42.30 support. These indexes and market dynamics have only improved since October 1. As a result, our outlook remains bullish and we continue to believe that the path of least resistance is higher for global equities. Below we summarize the basis for our bullish outlook.



What supports our bullish outlook? (1) Not one broad global index (MSCI ACWI, ACWI ex-US, EAFE, or EM) is breaking below a key support level; in fact, several are hitting multi-month highs, (2) the US dollar remains below 95-96 major resistance, (3) defensive Sectors such as MSCI ACWI Consumer Staples, Utilities, and Real Estate continue to make lower highs in terms of relative strength, (4) MSCI ACWI and EM Consumer Discretionary vs. Staples ratios remain in uptrends, (5) breadth is improving in the US, Canada, Germany, UK, Hong Kong, Australia, and Singapore as measured by their respective advance/decline (A/D) lines, (6) high yield spreads in the US and Europe continue to make lower highs and remain devoid of bullish inflections, (7) the 10-year US Treasury yield is at multi-month highs, and (8) broad commodities – Bloomberg Commodity Index – remains above key support. These are all signs of a risk-on environment, and one where a bullish outlook is appropriate.



What are the risks to our bullish outlook? First, despite the US 10-year yield creeping up to multi-month highs, it is still moving in a broad horizontal range. Additionally, the 10-year German Bund yield is near multi-month lows, and is also moving in a broad horizontal range. This tells us the bond market is not expecting robust global growth looking out 3-6+ months. If sovereign yields were to break lower it could create problems for global equities. Second, the MSCI ACWI Financial Sector has been unable to break above resistance and the MSCI ACWI Energy Sector remains in price and RS downtrends; we need to see price trends improve for these Sectors. Overall, these are the two primary concerns we have that could derail this bull market. While they have the potential to correct themselves in a way that is favorable for equity bulls (i.e., if sovereign yields move higher and Financials & Energy make bullish inflections, for now they have us on our toes. Additionally, it goes without saying that any number of the bullish items listed in the above paragraph could take a turn for the worse, which would negatively affect our outlook.



Bottom line: As long as the MSCI ACWI (ACWI-US), ACWI ex-US (ACWX-US), EM (EEM-US), and EAFE (EFA-US) are above their respective intermediate-term support levels we believe a positive outlook is warranted. Support levels to watch include $77 on ACWI-US, $44.70 on ACWX-US, $42.30 on EEM-US, and $62 on EFA-US. Ultimately, we put a low probability on these support levels being visited again.