We’ve spent a whole lot of time this week talking about how important it is for EM investors to take a good, hard look at their positions as DM central banks get set to normalize policy.
The entire carry bonanza is to a large extent contingent upon accommodative DM central banks. When the liquidity tsunami dries up and when DM yields start to rise, sentiment around EM could sour. Especially if any of the myriad idiosyncratic risks (political or otherwise) get priced in.
Throw in an uncertain environment for crude prices and a tedious situation in China (this month’s decent data – here and here – notwithstanding) and you’ve got a recipe for outflows. Indeed, we’ve already seen the flows start to reverse for at least one popular EM debt fund.
To see just how important the messaging from DM central bankers truly is for EM, look no further than what we saw this week in the The Direxion Daily EM Bull 3X Shares ETF and the ProShares UltraShort MSCI Emerging Markets ETF:
Underscoring this point, EEM is up more than 4% on the week:
As Bloomberg notes, the EM rally has now reached a fever pitch, with “the MSCI EM RSI now at the highest level since December 2007 and is approaching 70, where it hovered for four years before the financial crisis as stocks rallied 400 percent”:
So yeah, “carry” on – but just remember that “what goes up“….
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