In the week that was, we went from the edge of an emerging markets correction to a place where a lot of stocks are trading at levels that look interesting as an entry point.
After the pullback, global emerging markets valuations are nowhere near as stretched as they were back at the April peak. In fact, the only caution flags should be related to higher inflation readings in Brazil, China and Turkey — among others.
This demonstrates how macro trades are still dominating all markets. China and emerging credit markets will be the keys that either let us rally into the new year or put coal in the stockings of market players.
China dodged a bullet this week but inflation will not go away in the food sector. Beijing may still move interest rates higher, so keep an eye on the press this weekend for a potential announcement. In fact, the government did raise reserve requirements last night, has let the yuan appreciate and has promulgated a list of policy operations aimed specifically at curbing a 10% surge in vegetable prices.
Brazil: Dilma will meet with the head of the central bank to determine his future. Comments and body language have led the markets to expect that Henrique Meirelles may not stay much longer in his job once Dilma takes over running the country. In any event, Brazil has traded poorly all year except in the consumer names. If Dilma wants to win the market’s confidence, she needs to prove that she is serious about fiscal adjustments.
The macro data calendar is very light in what U.S. traders know is a holiday-shortened week. Do not gloss over the Fed minutes due out Tuesday, but in general, the lack of macro headlines should give you a decent glide path to see the recent snapback continue.
Caution: It was last Thanksgiving that many emerging market traders were dragged out of bed at dawn by the Dubai debt crisis and the ensuing volatility took over the news for days afterward. Dubai made comments last week that sounded eerily similar.
Disclosure: no positions