Emerging Markets have been enjoying a great bounce over past weeks. Late last year we wrote that a possible Emerging Markets Bonanza was unfolding. To wit:

A mix of; falling oil prices, a “pause” in the Fed´s rate hiking cycle and a softer USD could all be leading to an interesting set up for Emerging Markets going forward. 

Most of our logic back then has played out relatively well, but as the EM space has been rallying hard, and the fact nothing has really been fixed in the trade deal talks, we would actively be looking to take chips off the table.

The biggest ETF, EEM US, broker the negative trend but is reaching big resistance levels around the 42 area. That level of resistance has held several times and crushing it right now seems not very likely. Chasing Emerging market longs here is a late trade according to us.

The JPM Emerging Markets Bond ETF, EMB US, has been rallying strongly since recent lows. It is easy to get excited, but note the ETF is just hitting the 200-day average. It needs at least a pause after the huge run.

Emerging Markets volatility, VXEEM index, has imploded over past weeks. Volatility is not cheap as such, but it has gone from panic levels to a more longer term “normal” level which has been somewhat of an average level over past years.

Below chart shows the VXEEM (orange) and the JPM EM FX volatility index (white). If anything, equity volatility has come off relatively much quicker.

Given the fact investors still only talk about the great trade deal, and related markets have rallied so hard, it would only take a Trump tweet to derail recent optimism.

We felt comfortable taking the contrarian long trade late last year, but chasing Emerging Markets longs (and others) here is starting to look like a potentially expensive trade.

Current calm in markets is starting to look too calm in our view.

Source: charts by Bloomberg