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Markets Soft without Stimulus

Markets around the world pulled back the reigns as central banks look to taper quantitative easing. Japan’s central bank decided to leave their current pace of monetary policy unchecked, which has effectively cut the Nikkei down 1.5% on the day, affecting nearly every market in-between, scaring the DJIA 165 points off the start this morning. US Treasuries have now notched the highest yield in 14 months on the 10 year note.

This morning 55,257 EEM July 35 puts were purchased by a trader for $0.29 each, costing him a large $1,602,453. This is a bearish move on the Emerging Markets ETF, with expectations that by the July expiration, the price of EEM will dip below $34.71. EEM opened today at $39.32 and if this trader was to pass the breakeven point, the ETF would have to drop by more than 11.7% within a little over a month.

EEM opened today 1.9% lower than its closing price yesterday and since the 52-week high the ETF experienced in early January, it has lowered by over 13%. While this may sound like 11% is not too big of an estimate for the bearish trend that EEM has been experiencing, the drop between early January and now took place over a much longer time period than between now and when the July puts expire. EEM also showed a slight rally from mid-April until early May, but fell short of the January high by about 2.3% and has declined ever since.

Another way to analyze the stock technically is to compare the moving averages. Four days ago from today the 200-day moving average crossed above the 50-day moving average. This is known as a death cross; when the long-term moving average pushes above the short-term moving average this hints at a future bearish trend. EEM has already shown bearish behavior, and this could mean that the decline could continue further. Looking at historical data, last summer the 50-day moving average dipped below the 200-day moving average, and EEM reached its 52-week low a month after.

Attention to the actual health of the emerging country relative to others is another tool. When looking at currencies in these countries such as the Thai Baht, South African Rand, and Brazil Real, there is a noticeable depreciative trend when compared to the USD. For the past month and a half, the value of the dollar has appreciated steadily against the Baht (by 7.8%), the Rand (by 13.7%), and the Real (6.7%). This is indicative that the economies of these emerging markets are not doing as well as the United States, and therefore money might begin to flow from them and back into the US.

The US economic policies hold water over emerging markets as well. Expectations in the news recently have been stipulating when the Fed would begin tapering the quantitative easing and therefore decrease bond prices as raise bond yields rise. This would cause risk-averse investors to put their money into US bonds in order to capitalize off of the higher yield and lower risk that these bonds would provide over emerging market investments, thereby drawing money out of these markets and bringing money into the United States.


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