Tolstoy says at the outset of “Anna Karenina” that all happy families are happy for the same reason and unhappy families are unhappy for different reason. I always thought he got it backwards, but that’s another matter. What we can say about emerging markets is that they have all been unhappy or happy, as the case may be, for different reasons.

Bottom line: The Chinese stock market remains vulnerable to bad trade news but the Chinese currency is well under control. Sell currency volatility.

The dispersion of returns in EM is at a two year-high (that’s the x-sectional daily standard deviation of monthly returns).

X-sectional standard deviation of monthly em returns

Here’s the scorecard for ETF returns during the past week:

ETF returns

China is doing fine. The Sinosphere is doing well. Mexico is doing well for idiosyncratic political reasons, and so is Turkey (during the past week). Brazil is doing terribly for its own idiosyncratic reasons.

If EM is the canary in the coal mine, we can conclude that each of the canaries in the cage is singing its own tune for its reasons, and there is very little systemic effect.

Going down the list individually:

1) Turkey will open tomorrow after the long Feast of Eid; the market stabilized last week after a crash, following suggestions that Qatar, China and Germany all would help Turkey. Although Chancellor Merkel has said publicly that the there is no specific aid agreement on the table, German diplomats are discussing this with the Turks as we speak. The Asset, a Chinese government outlet, hailed the Turkish crisis as a great opportunity for One Belt, One Road last week. And of course Qatar pledged some money.

Bottom line: The Erdogan government is too feckless and too volatile to trust just now. This is a speculative, long-term price action trade. The Sharpe ratio can’t be good with this kind of volatility:

Implied volatility of Turkey

Brazil: The political situation is toxic and the currency is in free fall.

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Without an insider reading on the political situation that makes sense, this is too hot to handle.

China:

Stocks improved but another turn for the worse in the US-China negotiations could be nasty.

I continue to believe that the highest Sharpe Ratio trade in China is selling volatility.

USD CNY

The trade has made money since July 20 when I first pitched it (especially vs PHP vol). The Chinese monetary authorities are in control of the situation; there’s no capital flight, just an adjustment of domestic credit.

7 day repo vs CNY

I spoke to a Chinese central banker today (an old friend who used to work for me in the industry). They are flummoxed by the trade negotiations: Trump is demanding things they can’t give, such as the end of subsidies to industry, so they have no idea how this will work out.

The Chinese side in Washington last week tried to explain to the Administration that “Made in China 2025” was a “wish list,” not a concrete program, and they couldn’t shut down a program that didn’t exist in the first place. That didn’t get them anywhere. So the trade negotiations look dicey, but currency management is not challenging.

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