EFA, EEM Rally on Economic Stimulus, Weak Dollar

September 10, 2012 /

European and emerging market ETFs soared Friday, following through on strength sparked by the European Central Bank plan to buy bonds from indebted eurozone countries. The dollar’s plunge on a weaker-than-expected jobs report also bolstered gains earned in foreign currencies.

IShares MSCI EAFE Index ( EFA ), tracking developed foreign markets, gapped up 1.46% to 53.24 — a four-month high. It broke out of a textbook cup-with-handle base with a 53.02 buy point. It’s trading within 4% of its 52-week high.

IShares MSCI Italy Index ETF ( EWI ), up 2.99%, and iShares MSCI Spain Index ETF ( EWP ), up 1.87%, both soared to five-month highs.

IShares MSCI Emerging Markets Index ( EEM ) jumped 2.25% to 40.62 as it regained its 200-day moving average.

IShares FTSE/Xinhua China 25 Index ETF ( FXI ) surged 2.66% to 33.60 after the Chinese government announced a major infrastructure investment plan to help spur economic growth. The latest export data from Asia show exports to the European Union fell 15% year-on-year in July. Japan’s shipments to China fell 12% year over year.

“It is a battle between rapidly deteriorating fundamentals and the belief that central bank action will boost equity prices through increased liquidity,” Dick Green, founder and chairman of Briefing.com, wrote in a note. “The central bank argument is winning for now, but eventually the fundamentals have to improve or the summer rally will prove temporary.”

PowerShares DB U.S. Dollar Index Bullish (UUP), measuring the greenback against a basket of foreign currencies, fell 0.99% to a four-month low. The weak jobs report leads traders to believe the Federal Reserve will have to unleash more quantitative easing to support the economy, which devalues the dollar and boosts commodities. The U.S. added 96,000 jobs in August vs. 125,000 expected and below the 163,000 added in July.

“Today’s number (together with a sub-50 Manufacturing PMI on Tuesday) has acted as a stark reminder that the U.S. recovery is not only weak, but fragile,” wrote David Morrison, market strategist at GFT. “Over the past month or so, U.S. data was, on balance, surprising to the upside. This raised expectations that the economy was decoupling from Europe and China, where growth continues to slow.”

U.S. Markets Mixed

On the home front, SPDR S&P 500 (SPY) added 0.48%.

PowerShares QQQ (QQQ) shed 0.16%.

SPDR Dow Jones Industrial Average (DIA) was nearly flat.

The rally that occurred after the ECB bond-buying plan was mostly fueled by short-covering, says Tom McClellan, founder of the McClellan Market Report. Traders with short positions aimed at profiting from falling prices had to close out their positions by buying them back, which appears as increased demand.

“The thing about short-covering rallies is that the energy they bring is typically exhausted in just one day or less,” he wrote in a note. McClellan expects the market to pull back after Thursday’s strong rally.

Weekly Fund Flows

In the past week, investors pulled the most money out of Asia ex-Japan stock funds in three quarters, according to EPFR Global. Investors pulled $9.9 billion out of global stock funds, while funneling $3.19 billion into bond funds and $4.6 billion in to money market funds. U.S. stock funds saw outflow of $8 billion.


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