U.S. Election Primes Emerging Markets for a Big Move

(Bloomberg Gadfly) -- Asian markets woke to heightened volatility on Monday after fresh political developments in the U.S. raised questions about the outcome of the presidential election, which takes place in just more than a week. Emerging-market assets have been reacting badly to any news that anti-trade Donald Trump could become the leader of the world's biggest economy. 

At least one gauge shows that investors aren't just jittery, they're holding their breath ahead of voting on Nov. 8. The MSCI Emerging Markets Index, one of the most widely followed stock gauges for this neck of the woods, has been trading in a narrowing range, forming a triangle pattern. 

Technical analysts believe such patterns foreshadow big moves, either upward or downward. The shifts tend to be at least equivalent to the difference between the widest points of the triangle. In this case, that would be more than 40 points. If chart-readers are right, then, emerging-market stocks could swing by as much as 5 percent after the election, a wild ride no matter who wins. 

Until last week, investors seemed to be betting the move would be up, judging by bets on mini-futures contracts for the MSCI Emerging Markets Index. 

The trouble here is that so many bullish positions suggest that the effects of an unexpected Trump victory could be greatly intensified. Once again, as I pointed out

And here's further bad news for all those betting on a rise: In the seven U.S. presidential elections since the index was created, it rose only twice after the outcome, regardless of which party won. 

For all the headlines today, don't be surprised if emerging-market stocks become increasingly stable in the next five trading days. It's just the calm before the storm.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Christopher Langner in Singapore at clangner@bloomberg.net.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net.