Ad Hoc Commentary – the Ghibli curse came true, Merkelections will save the rest of us
As we wrote in on Aug 2:
“…Once every few weeks—the next time is Friday—Nippon Television Network Corp airs a Ghibli movie in the prime Friday evening spot. During the trading session after that, market veterans say, bad things happen…”
For now, The Ghibli Curse seems to come true and we are seeing everything selling off – bonds, equities and emerging market currencies. The only thing not selling off is gold – we should call that the Paulson’s relief rally. Don’t worry it will sell-off after the summer. Some say EUR is not selling off too. However, for EUR, we need to view EUR and European Government Bonds as a whole. As we said sometime back, the lack of a single federal debt moved currency trading into European Government Bonds trading. If you are bearish Greek Drachmas, you sell Greek Government Bonds. If you are bearish the European core, you sell German Bunds and French BTANs. It is worrying that capital is now flighting the core. Since Jul 23, 10y German Bund yields have moved from 1.5 to 1.9 (GDBR10 Index on your Bloomberg). Long time readers knows that yours truly was never bearish the EURUSD all these years despite the European Debt crisis. But given that Bunds is selling off, the time has finally come for the EURUSD to be shorted. That would likely be the trade of the year, sell EURUSD during Merkelections.
Yours truly is still bearish European core. As we wrote on Jul 23:
“…Merkelections will likely melt the European core. Big money will then have little hope in Europe and might thus let their BTANs and Bunds portfolio mature without reinvesting back into the European bond markets. The flight from Europe will be faced with the question: what is quality in a world of high taxes and high unemployment?…”
In a sense, Europe is going to be like a candle that sacrifices itself for the benefit of others. For now, America look poised to benefit greatly from the capital flighting from Europe. That will reinforce our USD strength story back in June:
“…My advice to the corporates who had been happily borrowing in USD for interest cost savings is this savings will soon turn into losses. You are better off unwinding these USD borrowings, or converting them via cross currency swaps into your favorite local currency…”
Yours truly had been massively wrong on capital flight into Asia:
“…countries with large middle-income populations like India and Indonesia will benefit most in 2013 onwards…”
Quite on the contrary, in recent days, India and Indonesia had seen large depreciations of their currencies and a free fall in their stock market. From the benches defeat, your truly just want to mention that eventually, a strong US dollar will accelerate the American sovereign debt crisis. It took Japan 2 years (1987 to 1989) from the inflow of capital to the Heisei bubble explosion. It might take America just 2 short years too. Asia will just have to wait for Clinton to be president first.
Good luck in the markets.