German companies are talking about slowdowns starting to put pressure on the second half estimates, and miners still talking about a drop in demand, US jobs numbers came in less than expected, and China is still trying to stem debt growth without dropping below 7% GDP growth. These are all negative signs to see in a global economic outlook, but one key indicator is missing: The VIX.
With the Wall Street fear gauge nearing record lows it seems the market is content as ever with the situation in the global markets. Being somewhere in between improving growth and still weak enough to need assistance, the markets have been flirting with higher highs recently. This could prove a nasty fall if the news doesn’t continue to be the right mix of good and bad. The short play of the Russell 2k is still something I would look at as the past few days have confirmed that the money that has been recently pushing these companies higher is getting more in line with the Emerging Markets returns on a daily basis (less the currency difference). This trend will continue if the markets start to take into account the news around the globe.
An increase in the VIX can be looks at as an increase in the correlation between the Emerging Market stocks and the Russell 2k index. Should the Fed feel that more stimulus is required from this pull back you may see emerging markets recover faster as well.
Another record for the major US indices. This week could mark more records for the market as long as good news stays good and bad news also stays good (but not too bad). With a lot of the markets looking a bit overrun, the economy will have the task of trying to stay up, defying Chinese and European data that could point to more downside. This makes one wonder where the best opportunity may come for shorting or hedging this rally in the future.
One place to potentially look is the Russell 2000 index. This index has been closely correlated to emerging markets over the past 5 years but has recently seen a rally at yeilds rose in the US, it became more pronounced once the Fed began talks of tapering, This could be for a variety of factors, be it political unrest, the threat of losing on FX from the rising dollar, or better opportunities in the US. In any case if the investors pouring into US small caps are the same ones that were looking for gains in emerging markets, the flight from these could be as severe as we saw with E.M this year. More talks of the Fed keeping the purchasing on track could see this gap narrow as well.