7 Jun 2013
Flash: The EM sell-off: Taking stock - Nomura
FXstreet.com (Barcelona) - Nomura Strategists note that this week started with a squeeze of long USD exposure while the market was looking ahead to payrolls and the ECB meeting.
Further, they note that USD was weaker against the G10 (except the antipodes), but had a more bid tone against EM and equities were also broadly lower. They have discussed the sell-offs in markets over recent weeks, most notably, the Japanese stock market has fallen off its highs, while the US bond market has seen yields spike higher. They add that in EM, bonds and FX have sold off, as well as equities.
They feel that there is little doubt that the sell-off in the US bond market, linked to uncertainty about when the Fed will start to scale back monetary easing, has been a key catalyst. They write, “In Japan, the Nikkei gained 46% from January 1 to its peak on May 22, and it is now considerably off from that peak. Clearly, positioning is playing a role. The other factor is volatility in the JGB market, which is making domestic institutional investors nervous. In EM, there has been disappointing growth news in China and Brazil.”
Next they ask when is this move enough in EM? They comment that EM is a broad asset class, so typically it does not make sense to talk about EM assets broadly. However, in this sell-off they see that there has been a high degree of synchronisation between FX, local debt and even hard currency debt (again suggesting that flow factors are at play). Further, since this EM sell-off is not about domestic catalysts, it is probably not going to matter much what domestic economic data do, although it may matter how central banks respond to FX weakness, if at all. They write, “At this stage, it is not clear to us that the EM sell-off is over. However, we do believe that some opportunities may begin to open up, and we would be looking to trade them when the panic is over. Indeed, we bought EUR/CHF, which has been driven lower by the EM squeeze (and their funding).”
Further, they note that USD was weaker against the G10 (except the antipodes), but had a more bid tone against EM and equities were also broadly lower. They have discussed the sell-offs in markets over recent weeks, most notably, the Japanese stock market has fallen off its highs, while the US bond market has seen yields spike higher. They add that in EM, bonds and FX have sold off, as well as equities.
They feel that there is little doubt that the sell-off in the US bond market, linked to uncertainty about when the Fed will start to scale back monetary easing, has been a key catalyst. They write, “In Japan, the Nikkei gained 46% from January 1 to its peak on May 22, and it is now considerably off from that peak. Clearly, positioning is playing a role. The other factor is volatility in the JGB market, which is making domestic institutional investors nervous. In EM, there has been disappointing growth news in China and Brazil.”
Next they ask when is this move enough in EM? They comment that EM is a broad asset class, so typically it does not make sense to talk about EM assets broadly. However, in this sell-off they see that there has been a high degree of synchronisation between FX, local debt and even hard currency debt (again suggesting that flow factors are at play). Further, since this EM sell-off is not about domestic catalysts, it is probably not going to matter much what domestic economic data do, although it may matter how central banks respond to FX weakness, if at all. They write, “At this stage, it is not clear to us that the EM sell-off is over. However, we do believe that some opportunities may begin to open up, and we would be looking to trade them when the panic is over. Indeed, we bought EUR/CHF, which has been driven lower by the EM squeeze (and their funding).”