Risky asset conundrum

Wednesday, January 10, 2007

OK, now it's just getting weird. Consider the following:

* Commodities continued to get smoked
* EM equities are getting killed
* Governments in Thailand and Venezuela seem intent on screwing foreigners. Yesterday's announcments in those countries sent their respective stock markets crashing, Venny's by an eye-watering 18.7% (see below.)
* EM currencies remain under very significant pressure (Macro Man's EUR/TRY trade has gone from tidy profit to breakeven since yesterday afternoon)


Yet....

* Developed market equities are holding in (indeed, the Nasdaq is actually up on the year)
* The G10 carry trade remains alive and well (NZD/JPY is up a percent this week)

So why the lack of contagion? And which set of assets is "right"?

The obvious answer to the first question is that there are two different sets of investors trading this stuff; equity/specialist managers for the stuff going down, and macro+yield hogs for the G10 carry trade. Yet this explanation rings hollow. Cross asset correlation has risen strongly over the past few years, an it frankly seems unusual that it would break down just because the calendar has changed to 2007.

As for which market is "right"....well, correctness is ultimately in the eye of the beholder (of your P/L.) But for choice, Macro Man remains of the view that the soft landing scenario remains the appropriate one, and that risky assets should ultimately fare pretty well in 2007. As such, he suspects that the current weakness in EM currencies and stocks will ultimately provide an attractive buying opportunity. By the same token, Macro Man hopes that G10 stocks and carry come under pressure over the next week or two so he can establish longs at attractive levels. Later today, Macro Man will publish a short note on his G10 carry beta plus research....

Today sees the release of US trade data for November, with the forecast forecasting a deterioration back to $60 billion. This comes despite the continued decline in energy prices during the month, as well as below trend domestic demand. Macro Man will take the "under" in the office pool.

On a related note, Macro Man has to smile every time he hears about the inexorable deterioration in US trade and the decline and fall of US manufacturing and exports. The front page of the Times of London today features features a rather large photo of a US export that won't be available in the UK for nearly a year....



Posted by Macro Man at 9:47 AM  

0 comments:

Post a Comment