This Week in Emerging Market Volatility

Going into 2013 there was a large consensus that emerging markets were going to have a great year. Like the US Equity market so far the bulls have been proven right. Both the Emerging Market (EEM – 43.99) ETF and Brazilian Market (EWZ – 56.17) gained last week and outpaced the S&P 500. The result was a big drop in the implied volatility of option on these two funds. VXEEM is now at a historically low 15.33 and VXEWZ closed the week at 16.91. Both curves had a pretty parallel shift as well, but they still have a little nervousness priced in. The key word in this sentence is ‘little’. The complacency that has taken over the US markets is working its way into the historically more volatile emerging market arena. Any big selloff that hits all markets could result in a bigger spike in emerging market volatility relative to US market volatility. This would be a detriment to emerging market bulls, but welcome by the volatiltiy players.