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Global Macro: Interest Rates Threaten Emerging Market Rally

NEW YORK ( TheStreet) -- As equity markets across the world look to be approaching major resistance levels, emerging markets are breaking higher out of consolidation patterns.

The move higher is a combination of improved global demand, rising commodity prices, and funds flowing out of developed economy's financial markets.

The first chart below is of iShares MSCI Emerging Markets (EEM). Emerging-market equities bottomed in late June and have since begun a reversal higher. Even in the face of a stronger U.S. dollar, which is usually bearish for emerging markets, these indexes pushed higher.

There looks to be room for more run up within the emerging market sector. As a point of caution , monitor how this exchange-traded fund reacts to rising U.S. interest rates to gauge whether there is a valid chance emerging equities reach its previous yearly highs.

The next chart is of iShares China Large-Cap Price (FXI). Chinese industrial production outpaced expectations last Friday. This pushed the China ETF higher, out of its bull flag consolidation on the daily chart below.

An increasingly strong Chinese economy signals that demand is returning out of economies in the West, due to China's heavy reliance on export to these countries. A unified global growth pattern is a bullish signal, even though major world equity indexes look overbought.

Watch to see whether emerging markets become the leaders over the next few weeks as U.S. indexes continue to trend sideways, or if all markets correct lower under the pressure of higher interest rates.

The last chart is of copper. Copper is a great indicator of global economic strength, and usually moves in step with investor sentiment surrounding the Chinese economy. China consumes vast quantities of copper, which causes demand to ebb and flow with the perception of China's economic health.

Copper broke higher last week on strong Chinese industrial data. The commodity, however, quickly came upon strong resistance levels.

This is overall a bearish signal to financial markets, but copper's ability to break out to new highs, will give a boost to riskier assets across the globe.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Andrew Sachais' focus is on analyzing markets with global macro-based strategies. Sachais is a chief investment strategist and portfolio manager at the start-up fund, Satch Kapital Investments. The fund uses ETF's traded on the U.S. stock market to gain exposure to both domestic and foreign assets. His strategy takes into consideration global equity, commodity, currency and debt markets. Sachais is a graduate of Georgetown University, where he earned a degree in Economics.

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