The last couple of weeks have been of no great surprise to TMM as the stresses of 2012 unwind and positioning tries to revert to a more normal balance. FX land has seen the safe havens unwind and it is interesting to hear the background excuses that cite local yet really its all part of the same great relief trade. For example GBP's tanking is, in TMM' s eyes, just as much about money going home as it is to the new focus on potential "Carney cuts" or recession part 3 (Which makes us wonder what will happen to the top end London property market. Time to play the Chelsea/Chester regional house spread -not that we can)?
Equities have done us proud over the past months but we are getting a bit wary. Not so much towards equities themselves, but the global mood backdrop as expectations have pretty much converged on -
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- US recovery - Agree, but looking at the Citi surprise index for US data sitting on zero we would suggest that s in the price.
- The Bernank prostituting money supply like a 5 buck hooker
- Europe will not die today. ( even Greece today announcing the worst is over)Asia is just fine.
- Japan will Bernanke the Bernank out of the Bernank.
- Yields will all rise.
- Equities are the no brainer. - Well we would agree that they WERE a no brainer, but as per above, we now have doubt.
Lovely - so what could possibly go wrong? Even Our friends at Hero Zedge appear to be scraping the bottom of the barrel for new negatives. (US lost the German's gold? Purleeese!).
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But the debate within TMM is how isolated different assets can remain if or when we start to see pressures build in other areas. For example, EM credit structures where rising US reference yields are making things pop and squeeze. Add to that the weight of positioning in that field that has been chasing the last bp in TMM's eyes EM High Yield credit is looking shaky. Recent moves in EM FX are predominantly being blamed on potential FX wars in Asia but we think there may be more behind this.
But how infectious would a credit sell off be? The pressures of "Risk on Risk off" have appeared to diminish and the fast flowing Roro river has hit the low planes allowing it form a delta with different asset classes feeling they are no longer influenced by other flows. Backwater micro analysis proliferating in the absence of daily changing macro news. Already the debate has opened up as to whether 2013 is a brave new world, a new paradigm in contrast to the paradigm rule book of 2008-12. This is almost as good an indicator in its own right. As soon as we hear the words "Paradigm shift" we worry.
So if we are already seeing positions being justified on the "No, this time is different", we are ready for the next "Oh that shouldn't have happened" event to occur to remind everyone of Mark Twain's quote about rhyming history. We don't believe that we can have a panicky sell off in one market without it starting to infect others, (Pink Flamingo rule 1) so despite equities being our "least worst" long option compared to bonds and commodities, we are putting our P+L where our thoughts are and have unloaded all our equity index longs in anticipation of the next unseen unseen. We would go further and suggest that that unseen is going to come from Emerging Market Credit.
What else? Well if we are looking for an EM wobble then the least we can do is look at the high yielding NAFTA favourite the MXN. Everyone's darling but if we get a big enough wobble we could see USDMXN easily pushing through 13.0000. While we are surmising a turn perhaps we ought to even look at GBP turning back up for all the opposite reasons that world has sold it. So let's go mad and buy GBP/MXN.