One might think that political stability is a prerequisite, or at least a positive factor, for a strong stock market. One might be wrong.

In Brazil, the Bovespa was already in rally mode when it shot higher on Friday after Lula—as the former president, Luiz Inácio Lula da Silva, is popularly known—was taken into custody for questioning about the nation’s long-running scandal over the state oil company, Petrobras (ticker: PBR). That, in turn, heightened speculation that the government of Lula’s successor, President Dilma Rousseff, could be toppled.

Brazilian bulls perhaps figure that a change of government might mean that, to paraphrase former President Gerald Ford after Richard Nixon’s resignation, the country’s long, national nightmare may be over. Not likely, given the inflationary recession in which Brazil remains mired (coincidently reminiscent of the post-Watergate U.S. in 1974).

Despite minor details, such as a lousy economy and political chaos, the iShares MSCI Brazil     exchange-traded fund (EWZ) popped 5.3% on Friday, capping a rousing 25% gain for the week. And Petrobras’ American depositary receipts jumped 12% on Friday, bringing the week’s gain to a whopping 55%. To be sure, the Brazil ETF is still down 68% from its level five years ago and 75% from its peak in 2008. And even after Petrobras’ massive moves, it was still 93% below its 2008 high.

Back in the U.S.A., the recovery in the stock and credit markets rolled on, undeterred by the spectacle that the race for the White House has become. No need to recap the unprecedented denouncement of the Republican front-runner by the two previous GOP standard bearers, the ongoing investigation into the Democratic former secretary of state’s e-mail server, and her socialist rival’s plan to raise everybody’s taxes and siphon more than $15 trillion from the private sector over the next decade.

None of this seems relevant at this point for the markets. The stock market ended higher for the third straight week. The major averages are up nearly 10% from February lows and closing near nice, round numbers—just over 17,000 for the Dow and just under 2000 for the Standard & Poor’s 500.

The rebound has been a kind of worst-to-first affair, with a left-for-dead offshore driller such as SeaDrill (SDRL) soaring over 100% on Friday alone—which still left it a mere 88% under its 2013 high. Clearly, the rebound of these oil-patch pooches has been turbocharged by the recovery in U.S. benchmark crude oil, to just under $36 a barrel from the mid-$20s at its low last month, which has been paralleled by a range of other commodities, including copper and iron ore.

Along with those dogs, a big winner has been CAT, the ticker for Caterpillar, observes Louise Yamada, the head of the eponymous Louise Yamada Technical Research Advisors. Up from the mid-$50s in late January to $72.84 on Friday, the heavy-equipment maker could run up until it hits resistance around $80, a 44% pop from its lows. Similarly, venerable U.S. Steel  (X) had bounced to over $14 by midday on Friday, from a recent low around $8, before slipping back to end the week at $12.98.

The leadership of the beaten-down stocks suggests to Louise that this is most likely a pleasant interlude otherwise known as a bear-market rally. Their bounces suggest some extreme bargain hunting, as well as covering of short-sale bets. Meanwhile, the ongoing strength in defensive stocks, such as consumer staples and utilities, many of which sport fancy, above-market price/earnings ratios, implies that investors are still bracing for more pain ahead.

The previous leaders—the big growth stocks such as Netflix (NFLX) and (AMZN), whose strength masked the declines in the broader market last year—rolled over as they entered 2016. The best go last when the bull market ends, she observes. After Amazon’s tumble from $689 near year end all the way to $482 in early February, it’s back to $575. But $600 looks like about it for the bounce, making this a rally to sell, she concludes.

The Dow and the S&P wound up the week around the low end of the ranges that Louise sees as major upside resistance (17,000 to 17,500 and 2000 to 2050, respectively). The action in financials also has been less than impressive, she continues; the Financial Select Sector SPDR ETF (XLF) is up 13% from its February low, to $22.28, but she doesn’t see the advance carrying past $24. “There are always bear-market rallies that lull us into complacency before the bear claw comes out again to swipe,” she said on Friday. Fair warning.

BRAZIL HASN’T BEEN THE ONLY emerging market in rally mode. And for the first time in a long time, mutual fund investors are getting in. General emerging market mutual funds saw their first inflows in 18 weeks last week, totaling some $196 million, according to EPFR Global data tracked by Citigroup’s EM team. Overall, EM funds saw a small, $15 million outflow, owing to $211 million exiting from Asia funds, mainly China and Hong Kong ETFs.
Those intrepid fund investors may be reacting to the worst underperformance of emerging market equities, relative to U.S. stocks, since the aftermath of the 1997-98 Asian and Russian debt crises. And the reasons for that are well advertised by now: the collapse in commodity prices, along with the surge in the dollar. That means that their export revenues are squeezed, while the burden of their foreign debt—mainly in greenbacks—increases.
But there may be more to the previous aversion to emerging markets. “The assumption that EM policy makers will always get it wrong is held with the same ferocious intensity as the conviction that our Fed will always get it right. In both cases, the belief endures despite powerful evidence to the contrary.” So writes MacroMavens’ Stephanie Pomboy in making the case for beaten-down EM stocks.
Steph says the tide is turning on both fronts. Commodity prices may be bottoming as capacity begins to be cut, evidenced by sharp reductions in capital spending. And while emerging economies are in hock to overseas creditors by $4.5 trillion, she points out that they also have $7.5 trillion in foreign-exchange reserves. That’s a far cry from the mere $620 million in reserves they held in 1998. Indeed, that cache was built to prevent a rerun of the crisis they suffered then.

WHAT’S ALSO OVERLOOKED about the supposed “doomsday” facing commodity producers in the bears’ focus on dollar revenue is that some emerging economies are suffering a lot less in local currencies. While gold is down 34% from its 2011 peak in greenbacks, it’s off just 7% and 11%, respectively, in Australian and Canadian dollars. In South African rand, gold actually is up 51%. And while oil has collapsed near its 2008 lows, valued in Russian rubles it’s up 150% since then.

What this means is that while these commodity-producing nations earn revenue in dollars, their costs are in their own cheap, devalued currencies. So, these emerging market producers are reaping the gains from currency devaluations.

Emerging market stock markets have fallen far more than warranted when you take into account this less-severe decline in commodity prices in terms of EMs’ own currencies.

Moreover, Steph vigorously argues that the radical monetary policies of major central banks, such as negative interest rates in Europe and Japan, will put a floor under commodity prices by debasing their currencies. Indeed, the ECB is widely anticipated to unveil more stimulus this week, including a possible further foray into sub-zero territory.

All of which leads her to EM stocks and commodity outfits. “Take the two most hated asset groups out there and put them together! To others, it’s repugnant. To me, it’s just resourceful.”
That includes Chinese stocks. As the Communist Party convenes its annual National People’s Congress on Saturday, the next five-year plan will be finalized, writes global research analyst Peter Donisanu of the Wells Fargo Investment Institute. That could include measures to deal with debt-laden state-owned enterprises and to continue the transformation to a consumption-based, rather than export-driven, economy. More to the point, Steph says that China’s government will do whatever it takes to prevent an economic slowdown that could spur dissent among a population of 1.3 billion, which could become restive if growth falters.

As for Russian stocks, she says that, regardless of one’s opinion of Vladimir Putin, the destruction of their values is way out of line with the drop in oil, even in terms of devalued rubles. The most readily available way to put that thought into practice is via the Market Vectors Russia ETF Trust (RSX). And to gain exposure to the South African economy, there’s the iShares MSCI South Africa ETF (EZA).

A couple of closed-end funds offer similar exposure at steep discounts. The Central Europe, Russia & Turkey CEE  fund (CEE), managed by Deutsche Asset Management, closed on Thursday at a 13% discount to its net asset value. And ASA Gold & Precious Metals ASA  (ASA) invests in African and North American miners, while trading at a 14% discount. The EZA ETF, meanwhile, is dominated by Naspers, an e-commerce outfit, and so wouldn’t get a direct commodity kick.