Between Korea, China and the EU, markets are on edge. If you walk in on Monday without checking out what Asia did on Sunday night, you may start out well behind the curve.
This weekend has the potential to deliver one or more weekend developments that kept global markets on edge last week around the U.S. holiday:
Korea: Incendiary commentary in North Korea is inspiring the military state with nothing to lose to battle onward. Again, for Pyongyang, it’s not about the economy, it’s not about the political struggle: it’s about a show of force that makes them stronger — or so they think. China has already warned that it will not tolerate aggression in response, while Japan is ready to jump in alongside South Korea and the U.S. military standing by in the Yellow Sea.
Watch these developments over the weekend and into next week, and stay away from South Korean stocks until this dies down. We are already beyond where most of these skirmishes have gone and where markets quickly came back — EWY (quote) is still down 5.4% from where it was before this started. When the dust clears, you are buying names like Samsung (OTC:SSNLF) (if you can), LG (OTC:LGERF) (or at least LPL, quote), Shinhan (NYSE:SHG) (quote), SK Telecom (NYSE:SKM) (quote).
China: Rate hike over the weekend? I doubt it, but the markets aren’t so sure. Shanghai A shares closed last night resting on the 50-day moving average, which indicates that we are right on the edge of a decisive move here, one way or another. I do believe that Shanghai is still a leading indicator of global emerging markets risks. It is not the only indicator, but it needs to be respected.
If Shanghai breaks under the 50-day line Sunday night, you have to go all the way back to April (barring two small challenges in September) to see what this could entail for global investors. The April break set the stage for a fairly choppy period for Asia and led into the May disaster for western markets.
Europe: Ireland’s bailout from last weekend has now been formalized, but the EU is still far from harmonious. What needs to be done to really clean this up is to address Spain and Italy right now, even though they do not need immediate help. If they do this, they can draw a line around some of the banks’ exposure to debt restructuring and remove the systemic element that keeps dragging credit markets throughout the region down.
Do not forget: German economic numbers are still at or near their best levels ever. Europe is fundamentally healthy; it is just the sovereign issue that makes things look worse.
But even in the midst of all these risk factors, Russia is still trading great and has gone from unloved to a great market to hide out in. Expect this trend to continue. Brazil has been overly beaten down as well, but is also setting up for a rally into yearend on Dilma cabinet appointments and total underperformance. Banks in particular are getting interesting.
Disclosure: No positions