This Week in Emerging Market Volatility – 9/13/2013

Emerging markets turned in a strong week with the iShares MSCI Emerging Markets ETF (EEM – 41.15) rising just under 3% and the iShares MSCI Brazil Capped ETF (EWZ -46.67) gaining a tad over 3%.  EWZ is up over 12% since mid-July as well.   Emerging markets have drastically underperformed the developed markets for most of 2013, but seem to be making a run to the upside.  The chart below is a weekly price chart of EWZ in 2013.  Some technicians would say a double bottom is in and higher prices are on the horizon.

EWZ Price Chart

All this enthusiasm for emerging equity markets is translating into lower implied volatility as indicated by option trading on EEM and EWZ.  VXEEM dropped almost 2 full points last week to settle at 24.29.  Possibly of more significance is the shape of the volatility curve this week.  A normal shape is developing which usually indicates bullishness or at least a lack of concern about weakness through the end of 2013.  VXEWZ closed at 27.57 with the front month at 28.20.  November is at a premium which December and January are both at slight discounts.  Maybe a couple more weeks of firmness in EWZ will result in a return to contango.