Tuesday, September 07, 2010
Having ranted on all summer about how we were expecting the STFU and sticking plaster PR policy in Europe to start to unravel in September, it is no surprise to see Europe come screamingly back into focus. But the catalyst being the WSJ article quoting the bleedin' obvious re the bank stress tests that we all knew when they were first announced, is just laughable. The story in itself is not enough news to turn things, it's just the key to the Pandora's Box that Mangler Merkel and the professional Euroteers have managed to lock that "bleedin' obvious" in all summer. As we mentioned a couple of days ago, there is nothing like a good strike and its associated inconveniences sprinkled with Irish banks to focus the mind. We just don't know whether this is a little early and would have preferred to have had this turn around in about a week's time after a bit more western "risk on" is sucked in.
But "risk on" is a strange animal these days and is not generalized. If you look at western equities you'll see a summer range. If you look at western bonds you'll see it as a "risk off" environment trend, but if you look at Asian emerging markets you'll see a climb that is a trend following model's dream and screams "risk on".
While the likes of Zerohedge and Business Insider have now bludgeoned the general public into utter stupefaction and boredom with the various treasuries/gold bubble or not arguments, TMM are of the opinion that the most overstretched trades lie elsewhere. Take, for example, all things Southeast Asia. As you can see below their equities have had quite a run to say the least, but not without some choppiness over the summer. Foreign fund flows have been strong - look at the cash going into the IDX and EWM ETFs.
Earnings multiples appear to be vaguely under control though, so as much as the chart looks like a sell the fundamentals make it hard to rip into without an obvious catalyst (falling palm oil, coal and rubber prices?)
Onshore local currency bonds are another matter entirely. When some of TMM piled into this trade a little over a year ago it was a little like going into a train station in the wee hours of the morning: very empty, vaguely terrifying and the one harmless-looking guy on the platform is oddly out of place and just might be a serial killer.
Those days are gone and the positioning in Indonesian government bonds shown below
looks more like this...
TMM is increasingly of the view that the summer drift is coming to an end as the Troll under the Euro bridge is stirring again. We also think the decoupling stretch in the East is going to start to snap back, as it is not clear how much more appetite Asian CBs have for letting their FX rip higher without China contributing or how much more risk western PMs are willing to throw that way if things at home start to blow again.
Decoupling may be THE theme of the next, ooh, 5-10 years but given the dynamics of risk budgets and the extremes of positioning we are seeing it feels less like the trade of the next month or two.
White socks? We will hold the line and not sell 'til we can make out the label.