The emerging market sector was down slightly last week when measured by using the performance of the iShares MSCI Emerging Markets ETF (EEM – 43.71). Despite the small drop in EEM, the implied volatility of EEM options dropped as well. I usually attribute this sort of price action to the US markets and the S&P 500 did manage a gain last week.
The Brazilian market and associated volatility index behaved just like EEM and VXEEM with the two dropping in sync. There is a little more to the price action in VXEWZ and it is associated with the political situation in Brazil. We are about two months away from national elections in Brazil which occur on October 5th. We may get to see some added price action in VXEWZ as this event approaches.
The VXEEM curve returned to a fairly normal state of contango as the markets all calmed down last week. Looking on the right side of this figure below things are pretty interesting. As mentioned above Brazilian elections are on the horizon and the result occurs between the September and October expiration dates. September futures settle in a value based on October EWZ options and as the election will be just a couple of weeks away when we settle September VXEWZ future it appears from the high level of VXEWZ futures that the markets expect some real uncertainty to be in the market just before the election.