Emerging Markets? More like Submerging. (Yes I stole that joke from stocktwits)

Anybody who isn’t aware: Sri Lanka officially defaulted on their national debt yesterday. I was going to look for EFTs with exposure for put play, but stumbled across this Economist Article. (google cache version)
If the author is to be believed, this is only the first of several that we should expect. I don’t see any of the global geopolitical conditions that caused Sri Lanka’s default to ease up any time soon.

The question I can’t answer, and the reason for this post, is HOW DO I PLAY THIS? I’m aware of EEM etf but it’s been all over the place recently. IV is low though? Not sure what make of this.

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Also identified VWO and IEMG as potential targets. Neither has weeklies on their chain. Don’t think that matters here because I don’t expect this to play out by next Friday.

Here’s a CNBC article from January with a similar outlook

I also would not be surprised if and subject to this playing out we see some pullback in Finance, especially among big international lenders. Sucks when your debtor suspends payments and shit.

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Sri Lanka is fuck.
Indexes down 50% YTD.

Who next and where to buy puts?

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Are these going to be the next ETFs to get halted?

Maybe but probably not.
Direxiron EEM has a 3x bear ETF (ticker:EDZ) that’s been wildin out. Up like 40% since April 1 with no real resistance on TA other than March high at 15.4

I have orders for 15c 16c 17c but low volume/oi so they probably won’t get filled. Probably best to wait for global economic to stabilize a bit. China reopening should help. RvW news may also help to distract US from Ukraine WWIII fud. Once EEM sees relief EDZ should fall back toward ema. If that happens I’ll be looking at quarterlies for long term payout. Thesis is more at risk economies are going to keep collapsing because the people that study at-risk economies say they will. No need to force it.

Going to take a Jan '23 35P/36P Bear Put Spread on EEM tomorrow. Setting buy limit at 0.25 ea.

In general, we know that emerging markets are hurting. Partly because of recession/inflation and partly because of the strong dollar. In terms of strikes chosen, this is a very ghetto trendline, but assuming markets follow more or less in this direction. And can close position in 4-5 months at ~100% return.

Hong Kong might fare well, but expecting the rest of the countries to struggle for various reasons.

(Source)

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Bloomberg: Number of developing nations trading distressed has doubled, with El Salvador, Ghana, Egypt, Tunisia and Pakistan appearing particularly vulnerable.

Headline says it all.

I have also personally earmarked Turkey. It’s completely fucked. Currently looking at 75% inflation ( highest in G20) mainly brought about by failed attempts to prop up the Lira and shitty dovish monetary policy. It is also particularly interesting to me because Erdogan is fairly outspoken on the world stage and really seems to be cracking under pressure (plus he is a fascist so it’s nice to see his shit falling apart).

I am still watching EDZ quarterlies, and may start looking at 2023 leaps.

I am curious if there are any firms in particular with heavy exposure to any of these countries, or if this just stays an ETF play.

https://www.bloomberg.com/news/articles/2022-07-07/why-developing-countries-are-facing-a-debt-default-crisis

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Great visualization from the Visual Capitalist on which countries have the most default risk:

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El Salvador as we all know is the country that went deep into bitcoin…

Many of those other countries near the top of the list are north-african / middle eastern countries that are being heavily affected by the russian war and wheat shortage. I just watched a video that had a clip on Tunisia talking about how the government heavily subsidized wheat before the war to make it affordable, and now, well, prices are really out of control. I would assume it is similar with many other nations in that region.

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How is the bps faring so far?

The El Salvador BTC thing is an enigma. ES official recognized BTC as legal tender last (?) year, against IMF reccomendations. It makes me wonder if some BTC whale may try and prop them as proof of concept that BTC can work as a currency.

It seems that a common [factor/indicator] is ForEx depletion. The USD is THE reserve currency, as well as the currency used by the global south to pay down sovereign debt. They make payments in dollars, issue sovereign bonds in dollars (which they then pay interest on in dollars), use dollars to buy critical imports like food and energy, etc. The relative strength of the dollar has made all of this more expensive (here at home as well, but we have a lot more dollars and the option to print more). Using new debt to pay old debt is great if you can borrow at better rates. That is the opposite of what is happening, and further interest rates hikes by the fed will likely exacerbate the problem.

Anyway, I filled EEM, TUR (Turkey) and EWZ (Brazil) puts yesterday while I was in class, August and Sept monthlies. I expect that a rate hike announcement this month would lead to freefall, and I can’t imagine anything less than .5%. If I am not mistaken, consensus says .75% is eminent.

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Setting up to trade the bond side of emerging market weakness too.

Feels like getting into this trade a bit late, as convexity will prevent bonds from falling linearly, but what with fuel and food pressure still piling up on these countries, and with a default or two thrown in there… might be in the 70-75 range before the end of the year.

Put in limit buys for Jan 2023 75P/80P bearish put spreads on EWB. Hope it fills in the next few days or even weeks.

The USD also continues to display incredible strength, which should help this along.

Most of the bonds are government issued, so unlikely to face catastrophic breakdown, but also unlikely to bounce back as quickly.

(Source)

Reuters article talking about many of those same countries @The_Ni posted in that chart:

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I’m not sure how much of an impact this money will have, but I would be cautious to see how those affected markets react on Monday.

Pasting article since it’s paywall & short…

https://www.bloomberg.com/news/articles/2022-07-16/us-commits-1-billion-for-mideast-north-africa-food-security

President Joe Biden will announce $1 billion in US food security aid for the Middle East and North Africa at a summit of Gulf leaders in Saudi Arabia on Saturday, a US official said

Leaders of six-member Gulf Cooperation Council will also commit $3 billion over the next two years for projects that are aligned with the US-led Partnership for Global Infrastructure and Investment initiative, according to the official.

President Joe Biden will announce $1 billion in US food security aid for the Middle East and North Africa at a summit of Gulf leaders in Saudi Arabia on Saturday, a US official said

Leaders of six-member Gulf Cooperation Council will also commit $3 billion over the next two years for projects that are aligned with the US-led Partnership for Global Infrastructure and Investment initiative, according to the official.

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