Bears Feel They Have a Free Run

12/19/2014 12:01 am EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

For the week ahead, MoneyShow's Jim Jubak wants you to take a look at the rout the oil plunge caused in the emerging markets to see if it's likely to continue.

The oil plunge has turned into an emerging market route and what we want to watch for the week ahead is to see whether that continues. It's very clear why some emerging markets should be sinking like a stone as oil prices do the same. For example, if you're an oil commodities economy such as Russia your stock market ought to be going down. The ruble should be falling and the Central Bank should be in deep panic mode. On December 15 the Russian Central Bank raised interest rates in Russia from 10.5% to 17% in one move to support the ruble. I don't think that's going to give the market the confidence; in fact may do the otherwise but you can certainly see why Russia is in that situation, why Venezuela Government bonds are trading on 40 centers to the dollar given the state of the Venezuelan oil industry and given oil prices. You can understand why Nigeria is in trouble. All of those things make sense.

What happened really around the 15th, the 16th is that given what was going on in Russia and Venezuela the market decided that it was going to sell off all emerging markets. We had Mexico falling. We had Indonesia, we had India; everybody went down. Everybody decided that this was a replay of the 1997-1998 Asian currently crisis and we should sell off everything. The question is whether that continues or whether we start to get some differentiation. Not all emerging markets are the same. India for example is a net importer of oil and therefore benefits from lower oil prices. Mexico is kind of in the middle case where it is indeed an exporter of crude but it's a net importer of refined products so it gets a benefit and cost on both sides of this.

What's going on right now is the Bears feel like they've got a free run so after profiting from the 30% fall in Brazilian stocks since June they said okay, enough is enough, we've probably hit a bottom so let's move on to Mexico. The Mexican peso is a whole lot easier to trade than the Brazilian real and Mexican stocks were only down 16% so we'll move over there and get some action. The question is whether we continue to see this, whether oil prices continue to sort of drive everything in the emerging market on the idea that what's really going on in the oil market is not so much an excess of supply over demand but signs that global growth is slowing and so we've got a global drop in demand because global growth is slowing. That's the fear right now; that's what's driving the Bear in emerging markets and we just need to see as we move through the very thinly traded days of December and if in January when volumes pick up again whether that scenario remains intact or whether the Bears continue to be able to make profits everywhere in the world except may in the United States and Japan.

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