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A couple of things:
- Emerging market equities could be turning a corner - this isn't necessarily bad news for developed markets
- The sweet spot for silver: grey metal moving in line with global inflation expectations
Emerging market equities:
EM equities have underperformed developed market equities since the start of the year. However, the decline in EM stocks is losing momentum as the chart below shows. It is the spread between the MSCI EM index and the MSCI world index. The spread has bottomed after falling sharply since the start of the year. This sets the stage for a potential rebound in EM equities, which may signal some short-term negative price action for developed market equity indices as capital flows away from Western markets into the East.
Spread MSCI Emerging Markets - MSCI World
But, in the longer-term the fate of emerging market indices and developed world indices are deeply inter-related. As the chart below shows, the two have moved together closely since 2005. Thus, what's good for EM is good for developed market indices. Hence, indices in the West have rallied during the pullback in emerging market stocks, but they might struggle to gain traction if EM markets fell into a sustained bear market. Vice-versa is also true.
MSCI world (orange line) and MSCI Emerging Markets
Silver: in a sweet spot
Gold has traditionally been seen as an inflation hedge, but there is growing evidence that silver is being used as a way to for investors to hedge against price increases too.
The chart below shows silver (green line on chart below) and 10-year Treasury bonds. As Treasury bonds fell (yields rose), silver staged an impressive rally since the end of January.
2 factors pushed bond yields higher (prices lower), which have an effect on the silver price
1, fears about future inflation due to the Federal Reserve's lose monetary policy
2, expectations that US growth will outperform this year
Since silver is also an industrial metal, its price should rise with an improved global economic outlook.
Thus, as long as the global economy is expanding and inflation doesn't threaten growth, this is good news for silver.
Levels to watch out for in silver:
The sharp move higher recently shows no sign of abating and momentum is on the side of further gains in the silver price.
Resistance: Silver is at a multi-decade high, so above here ($33.40/50 per ounce) investors will probably look at take profit at the round numbers including $35 per ounce then $40 per ounce.
Short-term support : $30 per ounce, then $29.35 - the 50- day moving average.
Daily candlestick chart for Silver ($ per ounce)
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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