Cliffhanger

Clearly, this was a week dominated by concerns about what the ongoing dollar rally and rising U.S. yields will ultimately entail for emerging markets. That’s a bit of a cliffhanger right now, although if you ask Morgan Stanley, you should be bargain hunting, apparently.

The bank’s Hans Redeker says valuations are nearing levels where “the risk-reward is starting to look more attractive in countries that have suffered from position squaring.” They also note that the exodus from funds and ETFs doesn’t seem to suggest folks are panicking. EM debt fund outflows fell to $1.3 billion in the week ending Wednesday (from $2.1 billion the week before) and ETFs saw inflows during the same period, the bank says.

The dollar rose for a fourth week in five, and hit a new YTD high on Friday:

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10Y yields fell, providing a bit of respite after hitting their highest levels since 2011 earlier in the week.

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30Y yields fell into the weekend as well, after passing 3.25 on Thursday:

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Here’s Gundlach:

The day’s not over, but looking like 30 yr UST is not going to give the “2 consecutive closes above 3.22%” sell signal...not today, anyway.

— Jeffrey Gundlach (@TruthGundlach) May 18, 2018

U.S. stocks were lower for the third week in four:

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Worst week since March for the EM ETF:

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Have a look at the iShares JP Morgan EM Local Government Bond ETF:

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As Lisa notes, it’s hemorrhaging:

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For those interested in the full breakdown on how things played out for emerging markets this week, you can peruse the commentary and visual smorgasbord here:

• ‘We Might Have To Cut ‘Em Loose’: There Are Worse Things In The World Than An Emerging Market Rout, Right?

Also this, from Eric:

More evidence of calm before EM ETF bloodbath is traders (EEM) are bailing now, and allocators (IEMG) while not yet leaving haven't added inflows at all for 20+ days straight.. pic.twitter.com/iOVN4SYR1r

— Eric Balchunas (@EricBalchunas) May 18, 2018

Despite the dollar rally, WTI managed to log a third straight week of gains (six consecutive weekly gains for Brent) as Venezuela jitters and Iran concerns continue to cloud the supply outlook. Bottom line:

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Speaking of cliffhangers, things are getting dicey in Italy as investors are now facing the reality of a populist coalition and what that may entail for the country’s fiscal outlook. This was the worst week for Italian bonds since 2015:

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You can read (much) more on that story in the following posts:

• What Could Go Wrong? Italy Is The Proud Owner Of A Populist Coalition Government
• Italy’s Populists Furious That Bond Spreads Are Trying To ‘Blackmail’ Them, But The Real Victim Here Is Price Discovery

Gundlach had something to say about this too:

The Italian 10 yr yield is rocketing higher. Up 40 basis points in under two weeks. Chart looks very, very bearish. The sands are shifting.

— Jeffrey Gundlach (@TruthGundlach) May 16, 2018

Italian shares lagged their European counterparts for the week:

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Recent stumbles aside, they’restill doing quite well YTD:

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Five-month low for the euro:

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Four-month low for the yen:

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Oh, and make-believe space tokens had a rough week despite Thomas Lee’s best efforts:

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