This Week in Emerging Market Volatility

Emerging markets as measured by both EWZ and EEM were higher last week. I guess issues that weighed on the SPX and NDX (fiscal cliff, 2013 recession) are not of concerns to investors in China, Russia, India, or Brazil. At least not for the near term. 

EEM rose 1.4% last week and VXEEM dropped accordingly. VXEEM is hovering just over 20.00 and indicates that options on EEM are as ‘cheap’ as they have been in some time. Keep in mind studies show that when the US market comes under quick and dramatic pressure all markets seem to follow suit. Put another way, international diversification works until you really need it. VXEEW futures do offer an alternative method of playing a spike in volatility in the US markets as a big drop in EEM has historically results in a spike in the implied volatility of options on EEM.

EWZ was higher by over 2% last week and VXEWZ rose over 5%. Not exactly what you would expect from VXEWZ when EWZ was so strong. I have heard bullish and bearish outlooks for Brazilian stocks in 2013. 2012 was a tough year for EWZ as there was a 20% drop in the early summer. EWZ has been playing some catch up as of late, but when I see VXEWZ rise the same week there’s bullish action in EWZ I wonder if the bears have it right in 2013 for EWZ. One of the great things about all the volatility indexes CBOE publishes is that they are based on traders putting money to work based on an outlook. With EWZ trading up last week, traders bid up volatility as well. You can interpret that as money being put to work based on expectations that volatility is going to rise and that usually happens with respect to market indexes when the index drops.

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