My near term view is a bounce in broad EM, rather than a sell-off of SPX. The bounce in the broad EM equity indexes will be driven by a rebound in the non-EM, e.g, China/Korea/Taiwan equities, as markets back-off from their estimation of the the potential probability of trump actually following through on tariffs; this factor explains the sell-off of the non-EM over the last few weeks. However, the real EM, eg. brazil, will continue to be under pressure. EEM could rebound because it is dominate by the non-EM.
After the bounce, I think the EM sell-off will resume and in that case, SPX will ultimately catch up to the downside of EM and with EM falling even further-- a real risk-off event. My central view is that the trade issue will become clearer, and will likely escalate ( Issenstat , the adult in the china trade discussion, is leaving), which will put additional pressure on the non-EM. The real EM will continue to get hammered in equities and in fx as the USD continues to strengthen ( at some stage the follow through of commodity sell-off ). I believe that the Fed continues to raise rates, and the curve flattens. The US equities markets will ultimately fall reflecting the trade impacts on earnings, and push back on US companies from China—could china play the apple card—,stronger USD, more present wage pressure on earnings, as well as the ebbing of fiscal stimulus. As shown in the graph below some of the tariff trade has been priced into US tariff sensitive US stocks. Throw in an escalation of the Europe crisis, and you have a real risk-off trade.
So, here is what I would do
1. Restrike my EM equity put back down to a 30 delta, again December, which reduces my exposure to the EM downside. While I think the real em downside will continue, i think the non-em could bounce given the volatility of the rhetoric from Trump. Also considering adding more downside to brazil and Mexico, the “real” EM.
2. I am looking to put some exposure to further china downside