(25 APRIL 2017)DAILY MARKET BRIEF 3:As volatility drops, investors will demand EM FX

The most interesting result of the French election vote was the collapse of volatility indicators globally. The VIX index declined -19% from 15.30 while EURUSD one-month implied volatility fell to 8.20 from 13.45. The JP Morgan G7 volatility index fell to 8.03, a level not seen since November 2014. With volatility declining, a critical input in Emerging Markets investing is satisfied.

Looking forward to the next 2-3 months we are seeing clear sailing for EM investing. While developed markets are marginally rising, they remain significantly overvalued with corporate earning failing to warrant extended prices (INDU trailing 12-month PE at 20.81 and dividend yields 2.35 are both running well above historical averages). Given weak earnings, we doubt a mad rush from cash/EM in to European/US stocks, however there remains value in EM corporate. We concede that President Trump's renewed protectionism is concerning but given his lightening quick attention span, it is unlikely to remain a dominant policy objective (considering his healthcare and tax reform priorities).

We would avoid ZAR, TRY and MXN due to idiosyncratic risks but suspect yield chasers will migrate into high yielding EM. Finally, those that point to once historical accurate “sell in May” as a trading rationale, well there is not much to say there. Traders should watch today's US housing data, consumer confidence and manufacturing survey for the general direction of the US economy (and potential repricing for the Fed rate path).

By Peter Rosenstreich