Emerging Markets were destroyed by Trump and an election that promised not only to build and charge a wall to Mexico ( and put the ugly of the wall side on their side) but to crush China policy and make global trade a naughty word.
EM equities traded -9.5% almost immediately from the moment Trump took the podium to the end of the first week of the result. Then EM equities went down another 5% as the Dollar and rates soared and Trump showed no signs of letting up in his rhetoric, bottoming on December 22nd vs the SPX. The total move was -13.6% in 31 sessions.
Since that point EM equities have clawed back onto the mat and look to be ready to fill the entire gap down. Measuring the ratio of $EEM/$SPY traders can see that EM rallied 7% vs the SPX into the Fed meeting last week. Again, the reversal in the USD, topping rates on the UST 10yr, and global growth expectations accelerating were the reasons for the rebound.
The Fed on Wednesday gave EM an early spring break as they reassured the market rates will not move faster than 3 hikes in 2017(for now…). Since the Fe ,meeting, EM is +4.3% vs the SPX and now sits at .1686 on the “EM/DM spread”, as we call it.
Traders can look to another 3.7% of outperformance on the $EEM vs the $SPY to get back to election levels. $EEM itself has broken out of a multi-year range and technically stand out on its own.
We highlighted the Dollar bear cross last week and this plays well with the EM continued outperformance into next week. Note the 9d RSI on EEM is starting to look hot and you could stall a bit before reacceleration.
A return to the .1750 spread level would put the 2016 EM outperformance trade back on with next target at .1790.