Emerging Markets (
) trading lower today on a series of macro issues and market
specific dynamics. Much of the weakness has been follow through
from a weaker Asia session and developed markets which frankly
look to be in no man's land technically.
China macro and technicals clearly weighing on the asset class.
China Services PMI came out last night at 50.0 which is the
lowest reading on the series since its inception. This was far
below expectations of 53.1 and doesn't mesh with a view that
China macro has turned the positive corner.
The Manufacturing PMI levels of last week were seen as
evidence China (
) is recovering and possibly stimulating their industrial
economy. Yet, even though Services PMI is far less significant
than the closely watched manufacturing reading, it is tough to
reconcile the dreadful reading last night for an economy on the
On the technical side , there has been a few headlines that
noted market timer and hedge fund advisor to the stars, Tom
DeMark, was recommending to sell China stocks into strength as
the SHCOMP was hitting overbought levels and exhaustion points
were coming. Shanghai has been driving sentiment overall higher
and if Mr. DeMark is correct, overall Emerging Markets may give
Having said all that, we maintain that the Emerging Markets vs
Domestic Markets (
) trade will continue to work. I mentioned last night on
how Emerging Markets has outperformed Domestic Markets by 400bps
YTD and that we were targeting over 1000bps of outperformance in
However nothing moves in straight line and shouldn't for that
matter. We have guided that we think the spread takes a breather
at .2300 a place where it has paused 2 other times since Emerging
Markets bottomed vs SPX in March and bean a solid reversal.
Yesterday after 3 days of Emerging Markets outperforming Domestic
Markets in the face of rising rates fears and fed removing the
tasty punch from the market, we kissed the .2300 and like
clockwork we pulled back.
Today Emerging Markets is underperforming SPY by 60bps and we
think you can trade this another 25pips on the Emerging
Markets/Domestic Market spread before buying the spread
We are currently at .2277 and think there is good support and
rationale for re-entering the spread trade at .2250 area.