Tuesday, September 07, 2010

Was that a flash of White sock?

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.


Leftback said...

That might be a picture of London this week with everyone trying to board the one Underground train that is running.

LB looked at a chart of EMB recently out of curiosity and recoiled in shock. This is what happens when lots of CBs turn on the liquidity spigot simultaneously: it all has to go somewhere, and it ain't going into Greek govies, apparently.

Martin said...

It's supposed to go into Greek guvvies, dammit!

Charles Butler said...

If one can judge by the totally astronomical number of bloggers that have grabbed the WSJ story, it might be one to get on the other side of.

Polemic said...

Maybe Charles, But I d rather not be long of Euro. Only biding my time waiting to crucify it again ( or any part that breaks off it).

scharfy said...

Thought I'd ask the very sharp commenters (and TMM) the following forex/rates history question if anyone has a free moment during these boring days. (feel free to delete if off topic too much)

I was looking at a chart of 20 year Gilt yields vs BOE base rate, and the spread goes from 200 BPB to a negative 200 BPS from late 96 to early 98.

Chart of yield spread

The asian flu was happening, but I was too busy with youthful indiscretions, and don't understand the implications to the UK, so whats the story with that move in the UK yield curve.

Any insights would be appreciated - help out a Yank. Apologize for the off topic post - but you guys have a more nuanced view of these matters :)

Charles Butler said...

Agreed. Ireland and Portugal real smelly. But I got real interested when a guy I read who never deals with finance picked it up. By 10 AM NY, there were already 330 distinct blog references to the story - in English. I gave up on the news search.

This is asteroid hit territory.


Lord Digby said...

I have a question about the Indo local debt chart. If this is percentage holdings of local debt, why do all the holders not equal 100% all along the line? ie if the % of foreign holders have gone up, which group is not holding less?

vvv said...

something looks to be missing from that chart ie not included in the others

they dont seem to sum to 100%

-foreigners ~27%
-insurance ~13
-mutual ~8
-others ~7
-local pens ~6
-CB ~3

total 64%?

Martin said...

@scharfy: this was the first bout of inversion of the sterling curve. If memory serves, as usual it had smth to do with a new regulatory development arnd the liabilities of the defined benefit schemes and hedging thereof.

abee crombie said...

Nice post.. I recently heard that Hong Kong H shares are trading at a premium to A shares, which would also be a good indication of foreign interest in Asia. Any idea how to find that premium/discount via bberg


Nemo Incognito said...

Folks the reason they don't add up is because local banks are the plug - yield curve tend to slope upwards in a big way in most places EM and as a result local banks are happy holders of long term paper when they have a good deposit base and low loan/deposit ratio, both of which they generally do. If you put in the local banks the chart looks screwy because they are such a big number.

Nemo Incognito said...

abee crombie, you can get this data - just take all the dual listed names and do the analysis. I don't think there is a bloomberg function last I checked though you can just build your own custom index if you have a spare hour or so. Its mostly the big banks so get those 4 out of the way and all you have left are a few oil companies and that's the lot.

abee crombie said...

thanks nemo

mythoughts said...

"I don't think there is a bloomberg function last I checked..."


Dee said...

You don't even need a Bloomberg terminal for the chart of the premium between the Hong Kong A and H shares -- just go to Bloomberg's web site here: