The biggest threat to the global stock rally is coming from emerging markets. The weekly bars in the chart below show Emerging Market iShares (EEM) falling to the lowest level in nine months. It has also broken a support line extending back to the fourth quarter of 2011. Emerging market bonds and currencies have also fallen sharply. My June 1 message explained that rising U.S. Treasury yields undercut demand for emerging markets by reducing the appeal of higher-yielding foreign assets. I also expressed concern that weakness in global markets might cause some profit-taking in the U.S. So far, U.S. stocks have shown amazing resilience in the face of foreign selling. That may change, however, if foreign markets don't stabilize soon.
- John