This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Global Macro: What U.S. Equities Strength vs. Japan Means for Interest Rates

NEW YORK (TheStreet) -- The relative strength of the SPDR S&P 500(SPY) compared with the Precidian MAXIS Nikkei 225 Index ETF (NKY) signals U.S. interest rates may rise soon.

The indicator compares U.S. equities with Japanese equities by dividing a basket of U.S. stocks over a basket of Japanese stocks. When the indicator rises, it means that investors favor the U.S. market, and vice versa when the indicator declines.

Investors tend to favor equity markets where interest rates are increasing relative to the other country. For example, the indicator spiked to its 52-week high in May, when Federal Reserve Chairman Ben Bernanke hinted at winding down stimulus. That led to an increase in the U.S. dollar, which made equities in the U.S. more attractive relative to stocks in other countries.

The indicator isn't very accurate in forecasting if equity markets will rise or fall, but determining which market will be stronger has some implications. The indicator's spike in May showed that investors favored U.S. equities over Japanese stocks.

May was the first month since the beginning of the Fed's stimulus program, that the central bank discussed tightening policy. Both Japanese and U.S. equities fell, and the spike higher in the dollar and U.S. interest rates hurt gold and bonds.

By inferring from U.S. market leadership that gold and bonds could be in trouble, traders could have shorted commodities and bonds and profited from investor panic when the Fed made its policy statement in May.

The indicator again looks to be trending higher, just ahead of this week's Fed policy meeting.

The Fed began to rein in stimulus in December, after much speculation during the final few months of the year. Now that the market knows the economy can handle the reduced bond purchases, analysts believe the central bank will continue to cut stimulus throughout this year.

In Japan, the central bank appears to be committed to keeping policy accommodative to growth. That means that the yen will continue to be weak versus foreign currencies, which will help Japanese exports.

If the Fed announces a reduction of bond purchases by $10 billion on Wednesday, expect the indicator to rise and remain in a steady uptrend for the next few months.

SPY ChartSPY data by YCharts

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

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
SPY $205.18 0.08%
NKY $17.92 0.00%
AAPL $93.06 -0.60%
FB $118.23 0.14%
GOOG $699.71 0.58%


Chart of I:DJI
DOW 17,672.42 +21.16 0.12%
S&P 500 2,054.67 +3.55 0.17%
NASDAQ 4,732.2650 +6.6260 0.14%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs