On Tuesday, we went into a good bit of detail with regard to the fact that the following set of circumstances are probably a recipe for disaster:
- tightening in China
- Chinese econ rolling over
- plunging commodities
- EM priced to perfection
That fourth point is critical.
EM has already shaken off the beginning of what’s supposed to be a Fed tightening cycle and EM equities have recently decoupled from commodities.
So the obvious question is how many more bullets can a priced-to-perfection EM complex deflect? There’s certainly an argument to be made that the only thing keeping this thing from going off the rails is a stable yuan:
But stepping back from the recent commodities carnage, metals mayhem, and Chinese econ data, there’s a kind of 30,000 foot (to use a worn out cliche) argument for why EM could soon stumble upon its day of reckoning. Have a look at this:
Simply put, if that is indeed the “leading indicator” it’s billed to be, then history says EM is fucked.