NEW YORK (TheStreet) -- The iShares MSCI Emerging Markets (EEM) exchange-traded fund sold off heavily on Thursday because weak Chinese data and geopolitical events in emerging economies soured investor sentiment on stocks.
Emerging market equities sold off the entire session on Thursday as news from across the globe provided the needed catalyst to bring the index down from over bought levels.
The Chinese manufacturing PMI, released Wednesday, dipped to a four-month low for the final month of 2013. The number signaled that demand may be falling in the world's second-largest economy, which has negative implications for the country's future industrial output and export growth.
This could directly impact upon emerging market economies by decreasing demand for raw material exports to China, which would weigh on first-quarter 2014 GDP growth estimates. The United States manufacturing PMI was in line with expectations while labor market data showed improvement in jobless claims. The data prove the U.S. economy is on a stable track and could see further Federal Reserve stimulus tapering in 2014. Tapering would lead to higher interest rates in the United States. This correlates negatively to excess capital available to developing countries, due to a higher cost of borrowing. Less capital available to emerging markets hurts their domestic equity markets and is thus bearish for the emerging market equity index. Along with economic data, geopolitical events in Turkey and Thailand damaged investor sentiment. Political instability in emerging markets does not bode well for the country at hand, as well as surrounding countries. Due to the proximity of emerging market economies around both Turkey and Thailand, the news of political instability provided even more reason to sell the index. The selloff enhanced global market volatility, which led to Japanese yen strength against the U.S. dollar. The dollar/yen currency pair formed a double top on the hourly chart and broke lower as global equity markets sold throughout the day.
The yen is considered a "safe haven" currency and is bought during times of investor anxiety. The collection of events on Thursday gave the yen the fuel it needed to break out of its multiday consolidation pattern.
Another aspect to consider when analyzing the index's selloff is that it was the first trading day of 2014. Last year the sentiment was overwhelmingly bullish, pushing global equity indexes to record highs. The buying fatigue may have manifested itself with the day's catalysts, which happened to be weak Chinese numbers and geopolitical risks.
The chart below shows a heavy selloff in the emerging market equity index. With such a large-magnitude sell, expect for the index to consolidate in the days following. This will lead to a consolidation pattern from which we can then project the future movement of the index.
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