Is This Decline a Buying Opportunity? Here’s The Key Indicator To Watch.

India Is Now the Center of the EM Crisis—Watch EPI & ICN as They’ll Bottom First.

The turmoil in India seems to be asserting itself as the tail wagging the emerging-market dog.  The relentless declines in the rupee have been a problem for months, but the acceleration recently has stoked concerns that we may see a full-blown capital flight out of India.  That’s a pretty big concern, because while it is an emerging market, India is also one of the 10 largest economies in the world. A current-account or balance-of-payments crisis in India would have significant ripples across the globe.

Already a problem, the situation in India has been made worse by recent “flip-flopping” by the Reserve Bank of India.  Several weeks ago, the RBI took measures to tighten liquidity and push up interest rates in an effort to stem the slide in the rupee.  Well, it didn’t work, and yesterday the RBI reversed course and provided liquidity to the market (effectively pushing borrowing costs lower) after they realized that the higher rates they manufactured several weeks ago were putting stress on Indian banks and risking a further economic slowdown.

Basically, the market is losing confidence in the RBI. It is becoming clear that they don’t know what they want to do:  hold up the rupee or help support economic growth in the short term.

Bottom line is the rupee is making new lows vs. the dollar almost every day, and it’s becoming more volatile (it moved more than 3% from peak to trough yesterday) as the RBI flails about.

This sounds a bit odd, but I don’t think markets can rally until we get calm in the emerging currency and bond markets, and I don’t think we can get calm in the emerging currency and bond markets until India stabilizes. So, that puts the WisdomTree India Earnings Fund (EPI) and the WisdomTree Indian Rupee Fund (ICN) at the top of our watch list, just above the PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) and the iShares JPMorgan USD Emerging Markets Bond Fund (EMB).

Bottom Line

If you’re looking for a reason to be a bull, there were some anecdotal positives yesterday, but nothing much changed.  If interest rates can slow their ascent and emerging markets can behave (they don’t really have to rally) then, like we saw in July, this market can rally.

But, the bottom line is the global market continues the process of adjusting to the beginnings of a policy change from the Fed, and it’s an adjustment process that will take time and have its share of hiccups.  Although I think the burden of proof remains with the equity bears, I’d be cautious about adding any additional long exposure other than to European equities (EWU, EIRL) so far on this dip.

I will again point out that the much-easier way to make money from the new reality of higher interest rates is by getting positive exposure to higher rates (TBF, TBT, STPP), not by analyzing each and every tick of an equity market in August that is very thinly traded.