This Week in Emerging Market Volatility – 2/28/2014

Despite (very loud) proclamations that Brazil is in for a difficult 2014 the iShares MSCI Brazil Capped ETF (EWZ – 41.00) managed to put up a small gain last week.  Sometimes all the bad news is in a stock (or market in this case).  EWZ is down over 8% this year while the S&P 500 is making more all-time highs.  There is a reason volatility indexes are often called fear gauges and those in the know about how volatility markets work will look to the futures relative to the index to get an idea of what sophisticated traders are thinking.  Note on the right side of the graphic below that VXEEM was down slightly but the futures moved higher for more of a flattening of the curve.  You can read that despite lots of bad news last week and EWZ shaking it off, there still may be a few more hurdles for the Brazilian market to overcome in the next few months.

This skittishness about emerging markets showed up in the spot VXEEM index which  was up by almost 7% despite the iShares MSCI Emerging Markets ETF (EEM – 39.48) being flat on the week.  The futures followed VXEEM up a bit and the curve is bordering on backwardation, which is often a bad sign for the underlying market.

VXEEM VXEWZ

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Russell Rhoads, CFA

CBOE Options Institute

Russell Rhoads, CFA, is a Senior Instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and…

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