Since climbing off their post-recession low on Tuesday, stocks in the emerging world are coming back strong. The question is whether this is an organic rally or an artificial effect of central bank action.
The EEM, quote) bottomed out at $33.50 Tuesday morning and has been on the offensive ever since, closing Friday with a 8.77% gain to show for its four-day rally.
But as you likely recall, the recent chart is full of similar 6% to 12% head fake moves as EEM spiked before heading back to the downside on the latest twist in the euro zone’s predicament.
We need clarity on the currency markets before we can get clarity on emerging stocks. Until global traders stop liquidating in emerging markets and repatriating the funds, flows out of these markets simply cannot reverse.
Last week’s move looked exciting for emerging exchange rates, but was dominated by central banks reversing their position in the currency wars.
But today’s follow-up moves are encouraging. The South African rand (ZAR, quote) and the ruble (XRU, quote) are both gaining ground on the dollar in the absence of the policy trumpets we heard last week.
The Chinese are still letting the yuan (CNY, quote) edge up to the strongest levels in recent history — maybe not as fast as U.S. lawmakers might like, but still moving in the right direction — and the Brazilian real (BZF, quote) and Indian rupee (ICN, quote) are stronger today as well.
The latter moves are especially interesting because neither Brazil nor India has been aggressively intervening in the currency markets recently. If anything, Brazilian policy aims at letting the real remain weak, while in Delhi interest rate policy should naturally push the rupee higher.
Maybe this is the organic move we have been looking for. If so, look for a follow-on bump up for the emerging currency fund (CEW, quote) as well as many of the stocks we talk about all the time.