As the US enjoys Labor day, the Turkish Lira continues the reignited free fall move. Emerging Markets will set the tone this week again. We have Turkish inflation figures that will affect the FX, new fiscal plan in Argentina and renewed soap opera situation in Brazil and the fresh ban of da Silva.

The Turkish Lira is once again closing in on the huge 7 level. As we explained several weeks ago in “Spain’s Cold Turkey”, the obvious alert is watching BBVA and a few other big European banks.

JPM Emerging Market FX index has continued falling. You can call this pretty much unchartered territory and picking levels is impossible. Just be sure to watch this index  closely.

Beside affecting some directly exposed sectors and specific names, the Emerging Market stress over past weeks hasn’t really spilled over to equity risk on a general level.

If the EM risks will be contained or not nobody knows. For the few people that traded in late 90’s the Asian crisis back then was named “local crisis” as first signs of stress emerged. Later this local situation became global.

Note how the JPM emerging market fx vol index has shot up massively over past weeks (orange). We have warned about this and still consider this to be one of the possible canaries in the coalmine.  Recently even developed market fx vol (white) has moved a bit higher.

European equity volatility, V2X (green), trades somewhat higher as well.

VIX (yellow) on the other hand continues trading extremely complacent. We agree the SPX index doesn’t move much on a daily basis, but should the Emerging Market crisis go global, VIX will at some stage need to start pricing this risk as well.

Given the fact VIX is trading at relatively low levels (there is a natural floor to volatility), people are back from holidays, Q3 earnings are approaching soon and the Emerging Market crisis seems not ending soon, maybe one of the more interesting hedges lies in VIX strategies?

Source: charts by Bloomberg