Credit: Correlations breaking down?
DXY is 81 bps weaker today as Euro climbs back off technical support and ono comments about receiving industrial growth on the continent. What happened to the ensuing rally we are supposed to see in commodities and EM? Very muted at best but I guess we can accept that when we have also seen EM and commodities rally strongly thoruhg last week's Dollar rally. These trends are major breaks with the last 10yrs of price action. We consider this VERY supportive to EM and commodities.
Also note the breakdown at 100 again on the DXY:
Em can still outperform the SPX however and the range on the spread looks more interesting to play: Edging back towards .2100 on EM/DM (EEM/ SPY). Track this spread at home.
1050 is proving to be tougher road to cross than we thought on the MXEF (MSCI EM). Remember this index has done nothing in four years and effectively down since the peak in 2007 by 25%. We believe reversion to the mean ( EM will come back and outperform the SPX) is spurred on by the Fed hiking (not cutting!) rates. The irony is that EM was supposed to have been the greatest beneficiary of Fed liquidity and in fact it was most hurt as fears of current account issues and capital flight were more dominant than the actual carry trade allocations that did clearly take place.
Not all commodities are created equal but overall they are in a bottoming phase. Citi out today saying they think iron ore could test through $40/tonne into 1Q 2016. Hard to argue but we also would not be looking to bottom fish in Coal or ore producers. There is too much balance sheet devastation. Meanwhile we think that integrated miners and resource plays look interesting on a medium term view. VERY interesting. We are out there with only a few well known PMs and HF guys who think this is the next great trade. Copper, Grains, Ferts, some industrial metals…and OIL!
And Gold is not where we would play. Having said that, look at best of breed gold miners to see how a basing in gold prices will mean a rally here.
China industrial Output is released tonight along with other important macro data. After a few days of significantly weaker Chinese data we will be watching for a print of 7% or better as poll suggest or otherwise may see more talk of PBoC back into the easing game. Remember another rate hike is expected this quarter in our view. Liquidity is driving the local mkts move which last night continued to trade higher.
Today the FXI trading lower and offering interesting place to look for a place to re0-enter or put this trade back on. FXUI (Hong Kong based stocks) getting a bid from the local mainland investors as they are now able to invest via the MMA agreements that began last fall. After a 20% ,move in 10 days we are taking some profits and hope to re-load the gun around $49.00
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
