Weak foreign markets may serve as an ominous warning for U.S. stocks

Published Wed, Sep 7 202210:47 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Some foreign stock markets look technically fragile — from the point of view of chartwatchers — and that could be a near-term warning for U.S. equities and risk appetites in general. Global assets have been keying off of central bank actions, with the Federal Reserve the biggest driver. Interest rates have been rising around the globe and the dollar has exhibited generational strength against other currencies. U.S. stocks rallied Wednesday, as European and Asian markets were mixed. U.S. Treasury yields, which move opposite to price, were slightly lower, as the dollar took a break from its monumental run higher. The dollar index was at a 20-year high this week, while the British pound sterling traded at a 37-year low against the greenback and the Japanese yen tumbled to a 24-year low. "The dollar is one catalyst putting pressure on foreign markets," said Todd Sohn, technical analyst at Strategas. "It's also a constituency problem. When you think about foreign markets, especially Europe, most have little tech and mostly have consumer and energy exposure. Financials too. Those have been pretty awful for some time." The Global X DAX Germany ETF, which corresponds to the German DAX stock market index, is down 3.9% since June 30 , compared to a 4.6% gain in the SPDR S & P 500 ETF Trust , which mirrors the S & P 500. "You don't have your Apple type names there to keep the indices afloat," Sohn said. "The tech exposure they do have is semiconductors and semiconductors globally are very weak." Sohn follows foreign markets through ETFs, like the i Shares Europe ETF or iShares MSCI EAFE ETF, which represents stocks from 21 developed countries. European markets have been under pressure due to concerns about the war in Ukraine and worries that Russia has a stranglehold on Europe's energy supply and can crush the European economy. "Obviously the geopolitical stuff doesn't help," said Sohn. Overseas markets "are already retesting their lows...so when you think about the U.S. retesting the lows, it's already happening globally. I think of that as a headwind. You want to see a rising tide coming off major lows or at least some stabilization, but that hasn't happened yet." Sohn also looked at China, where the Xtrackers Harvest CSI 300 China A Shares ETF is down about 35% from its February, 2021 high. In 2022, the ETF rose sharply from late April to July 5, but then came under pressure again. Over the longer term, the iShares MSCI China ETF i s actually down about 8% since its inception in 2011, but its total return, including reinvested dividends, is up 13%, Sohn said. "They have boom and bust periods, where there's opportunities. As a buy and hold vehicle, they have not been that kind to you," he said. Katie Stockton, founder of Fairlead Strategies, said her clients have become very interested in what's going on in foreign markets as the dollar has strengthened. She studied the German DAX index, and found momentum has been negative and there are additional signs of technical weakness. Stockton said the DAX is approaching a retracement level of 12,273. The DAX closed at 12,915 Wednesday. "A breakdown would put secondary support near 11,325. Relative to the SPX, the DAX has extended its long-term streak of underperformance and continues to face macro headwinds," she noted. The negative chart for the DAX is not new. "Generally speaking, they're in downtrends. They have negative long-term momentum, just like the U.S. but they've underperformed," she said. "They've underperformed off the June bottom in the S & P 500. I think the underperformance is notable. It's not new. This is a long -term trend." Stockton said she doesn't necessarily see foreign markets as predictive, but China investing can serve as a sentiment indicator about risk in general, similar to the way crypto currencies reflect an appetite for risk taking. Sohn said one way to protect against currency fluctuations and declines in foreign markets is to look for hedged ETFs. For instance, WisdomTree Japan Hedged Equity Fund ETF (DXJ) has been trading sideways compared to the unhedged iShares MSCI Japan ETF (EWJ), which is trading near a two-year low. The hedged ETF is up 3.2% year-to-date compared to the unhedged ETF sliding 23.3%. "Maybe the play in 2022 were these hedged ETFs, but for next year, if you think the dollar is going to weaken, it's back to U.S. stocks," said Marc Chandler, chief market strategist at Bannockburn Global Forex Chandler said markets point to the Fed rate hikes peaking in the first half of next year. Over the next six months, Chandler said the trade could turn to buy Europe and other markets that look cheap because of the strong dollar. Chandler notes that all foreign markets aren't lagging. Brazil, for instance, has been riding higher along with its strong currency. The iShares MSCI Brazil f und has gained 9.3% year-to-date.