This Week in Emerging Market Volatility

Emerging markets dropped a little less than US stocks last week with EEM losing 1.6%. A lower stock index usually results in higher implied volatility and that held true as VXEEM was up a little over 5%. The 5% move higher in VXEEM relative to VIX climbing over 12% made me dig a bit on the relationship between the two for 2012. It turns out with VIX at 16.14 and VXEEM at 22.29 the spread between the two is 6.15 points and as narrow as it has been in 2012. The spread range between the two has been as wide at 12.81 points with the average at a tad under 9. The market is giving emerging markets a pretty low risk premium on both an absolute basis and relative to the US stock market.

Brazil had some macroeconomic news last week that resulted is both the stock market and volatility index dropping. There was the Brazilian equivalent of a Fed decision last week and going into that meeting VXEWZ was a bit elevated. As the risk of a big market move based on the pending Central Bank meeting so with some risk coming out of the market we saw a drop in VXEWZ which was down slightly even with the EWZ down as well. Typically implied volatility reacts to underlying market moves which results in the inverse relationship between a market index and the corresponding volatility index. However, we have also seen some instances of late where the volatility index shows some anticipatory action. VXEWZ last week was a good example of this.

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