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Global Macro: Traders Turn to Emerging Markets

NEW YORK ( TheStreet) -- Investors are choosing emerging-market equities over U.S. indices as the government shutdown continues.

Volatility is spiking, and traders are bidding bonds higher. That has hurt U.S. equity indices, while emerging markets have diverged on a path toward relative strength.

Emerging-market equities saw weakness during the period leading up to September's Federal Reserve meeting. Investors expected monetary stimulus to be reduced and thus higher interest rates.

When the Fed did not come through on expectations, emerging equities were bid higher and ultimately crashed lower in subsequent days back to their intermediate support line.

The chart below is of iShares MSCI Emerging Markets (EEM).

The weakness many emerging economies faced due to the rumor of tighter U.S. monetary policy caused valuations to become cheap and thus attractive. The index has been bought off of support levels and is now pushing higher as U.S. equities fall.

As investors remain wary of allocating funds to riskier U.S. assets, look for emerging markets, with their improved growth outlooks, to continue to trade higher.

The next chart is of the USDJPY currency pair. The dollar has traded lower due to weakening U.S. interest rates and investors' preference for currencies with less geopolitical risk than the dollar now has.

The weaker dollar is pushing funds into emerging economies as was stated above, and even into perceived stronger economies such as Europe.

Still, the U.S. is not expected to default on its debt obligations. Although volatility has increased, the iPath S&P 500 VIX ST Futures ETN (VXX) is nowhere near the levels that would be anticipated if investors truly thought the U.S. government was going to default. Still, investors are proving their mistrust in the U.S. by pushing riskier investments abroad.

At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Andrew Sachais' focus is on analyzing markets with global macro-based strategies. Sachais is a chief investment strategist and portfolio manager at the start-up fund, Satch Kapital Investments. The fund uses ETF's traded on the U.S. stock market to gain exposure to both domestic and foreign assets. His strategy takes into consideration global equity, commodity, currency and debt markets. Sachais is a graduate of Georgetown University, where he earned a degree in Economics.

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