This article is written exclusively for Investing.com
Emerging markets stocks were one of the hottest groups in 2020. But that started to change in late January and early February, as measured by the iShares MSCI Emerging Markets ETF (NYSE :), which is now down 7.4%. The decline may not be over, based on an option analysis.
One reason for the recent weakness in the emerging market group is stronger and rising US interest rates. This decreases investor interest in risk-of-trade, while also increasing costs for economies that may have large amounts of business or issue debt in US dollars.
Interestingly, the strong dollar helps push the European market higher. . For example, it has weakened significantly against the dollar. So it should help pull inflation and growth back to the European continent and help drive stock markets like those in Germany to record highs. Meanwhile, the UK, which is no longer part of the EU, has seen its currency weaken, the, and its stock market soaring to the highest levels since the start of the global pandemic.
There is a double edged sword of the dollar advance, as it does not treat all markets equally. This has led options traders to place bets, so emerging market sales are not over yet. On April 7, open interest rates for the EEM rose $ 51 on May 21 with about 32,000 contracts. It appears that these wells were bought at a price of about $ 0.45 per contract. It would mean the price of the FEM would drop to around $ 50.55. That would be a decrease of another 6.6% over the next few weeks.
In addition, on April 8 there was a significant rise in interest outstanding for March 18, 2022, putting $ 45, increasing by 10,000 contracts. This is a very long term bet that lasts almost a whole year. It looks like the trader paid close to $ 2 per contract and would imply that the EEM is trading below $ 43 next year, down nearly 21%.
If it is the case that lower prices are on the horizon, technical charts do not reflect that bearishness at the moment. The FEM has been able to hold above a critical tech support level of USD 52. Until that support level breaks, it seems unlikely that such a significant decline will occur. There are multiple levels of support along the way, with a break from $ 52 bringing the ETF down to around $ 50, making the May options a viable candidate, but the March 2022 options contract could be much more difficult to achieve.
A A stronger decline in emerging markets is likely to require further strengthening of the US dollar and interest rates to even higher levels. Given the strong economic recovery now taking place in the US, it seems very possible. However, if this happens and the euro falls against the dollar, it could give markets in Europe a meaningful boost in the coming months.
So it looks like emerging markets will struggle for the foreseeable future. due to the rising dollar, not all foreign markets are likely to suffer the same fate.
