Tuesday, July 15, 2014

Are Emerging Markets Ready to Act Similar to Taper Tantrum?



Upon reading an interesting note from Andrew Wilkinson at Interactive Brokers published in the Futures Magazine, ‘Did Yellen inspire bearish emerging markets options trade?’, I found some interesting additional technical details. 

 

Andrew points to a position taken that would benefit the put spread buyer of emerging market (MSCI TR) index ETF (‘EEM’) if conditions similar to those seen in the ‘taper-tantrum’ last year develop. 

 

I would note that the volume of late has been very soft on the EEM etf.  In late-April when the low of 40.54 was reached, the 15 day average volume was 73m.  Today that average is only 32m and it has been weak throughout the recent advance.  This declining volume has accompanied a price advance of 10% to this morning’s high of 44.32. 

 

Right now, there is a ‘bearish engulfing’ developing in this emerging market etf.  Back in late-May 2013, after some initial stray comments about tapering, a similar candlestick formation was seen.  The next day, the etf fell roughly 1% and fell by 15.8% over the next month.  As a reminder the 10yr Treasury yield also jumped from 60 bps over that period.  

 

 

Finally, the VIX was at relatively low levels in late-May ’13 and jumped following.  We are currently at relatively low volatility levels again having recently touched multi-year lows. 

 

The bottom line here is the question of whether the above mentioned developments point to growing concerns for a less accommodating Federal Reserve than previously expected.  A rising U.S. long rate will pull money out of emerging markets again similar to the way it has been attracting foreign buying on the back of low Bund yields.   

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