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Global Macro: Emerging Markets Are Taking a Beating

NEW YORK ( TheStreet) -- The Bank of Japan's decision to not do anything further with monetary policy left markets unsettled on Tuesday, and the general fear of what central banks will or will not do next has emerging market investors on their toes.

The pair below is of JP Morgan Emerging Markets Bond Fund (EMB) over Barclays 7-10 Year Treasury Bond Fund (IEF), which measures the relative demand for emerging market fixed income. Over the past six months the price action has oscillated within a sideways pattern, indicating indecision over future direction.

Central bank easing taking place across the world has pushed funds into emerging markets, which outperform when the U.S. dollar is weak. Starting in 2013 the U.S. dollar rallied, which had adverse affects on the pair below.

Another factor driving the chart lower is the emergence of volatility across world markets. As investor fear rises, it leads to a flow out of riskier assets such as emerging market debt and equities.

The pattern below reflects the uncertainty and overall rotation into a more cautious investment style. The wave of volatility over the past year has led to the emergence of a head and shoulders pattern within this intermarket relationship. By breaking the lower trend line, this chart has signaled that riskier assets, at least for the time being, are too much exposure to uncertainty for many investors.

The next chart is of MSCI Emerging Markets Index Fund (EEM) over Total World Stock Index ETF (VT). This chart measures the relative performance of emerging market equities compared to the broader world equity market.

In an article Tuesday, I discussed how Chinese weakness has drastically affected financial markets this year. The chart below is another testament to this. Emerging market equities have underperformed throughout 2013.


Chinese economic data have continued to miss time and time again, which has negatively affected inflation expectations. Lower inflation has led to weaker exports, as well as weakness in the commodity sector.

Exports and commodities are major revenue drivers for emerging economies, and broad economic weakness from their major importers, Europe and the U.S., has kept this pair falling.

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