EEM and Commodities, updated view

Back in early January I posted the charts of EEM and copper since 2003, with brief commentary. I think it is helpful to revisit those charts now, because something has changed.

Here’s the chart of Copper. It now has clearly broken down relative to where we were at the beginning of the year.

Now look at EEM. The longer-term pattern similarity is clear, but EEM has not broken down.

My guess is that it will. Here’s why:

The unwind in excess enthusiasm for EM and commodities has further to go. It was a 10 year run, and we are now in the 3rd year of underperformance. The unwind doesn’t have to last ten years–there are structural improvements in many of these countries and in the development of their local markets. But one look at EM corporate issuance over the past 5 years and it is easy to see there is still an enthusiasm overhang that we have to work off.
The fundamental factors that would staunch the outflows and attract sustainable inflows are not in place. I’ve talked about these three a lot over the past few years in conference presentations, tweets, and the occasional post, but it boils down to a growth differential vis-à-vis developed markets, the US dollar, and US rates. None of these factors is working in favor of EM now. I don’t see any signs of them changing soon, either.
Dem charts, doe.