My goodness! If last week wasn’t bad enough this week was horrid! There just seems to be no escaping the wrath of Mr Market unless of course you were short commodities, equities, and long treasuries and the USD (where have we seen this before). Anyway we have no problem with a pull back in the “market” (yield/carry trade) for a week or two or even a month or two, providing of course that it is just that – a pull back/correction in long term up trend.
Where we tend to lose sleep is when we have these little “panic attacks” that maybe this is the start of a reversal in the trends we saw develop in the in late 2008. OK so if this was the start of another “big one” what would we typically expect to see? Well let’s go back to the start of September 2008 (before Lehman’s went bang) and observe what the risky assets of each asset class were doing relative to the least risky assets. Well have a look at the four charts below – they were being pounded on no uncertain terms and had been so for at least four months.
Now fast forward to the present. The tone of the popular press would have us believe that the “risk trade” has already broken down to multi-week lows. But, seemingly against all odds, they haven’t! From the graphs below you will observe that they have merely given back the gains made in December.
Of course this begs the question, is the behaviour of the market depicted in the charts below suggest that the fall in equities and commodities is just a temporary setback (like in June/July and October last year), or is the behaviour of equities suggesting something big to the downside is about to happen in risky assets? Not being ones to sit on the fence we place our faith in the former.
Now touch wood the Aussie dollar holds out……but even if it breaks to a multi-week low it is not exactly a train smash for the carry trade, to us the behaviour of junk and emerging market bonds relative to US treasuries is more important, well it was last time around at least. Maybe puts on the AUD would be a good hedge for long positions in equities and commodities at least.
