Since the last time we wrote, many things have happened on the markets.
The Fed has finally turned on its tapering programme in mid-December and said it would unwind its asset purchasing by another 10 billion in February. This long expected event has provoked what news broadcasters all over the world have been calling the EM Sell-off. Enormous amounts of liquidity have been taken out of the developing countries, driving their currencies down and creating huge losses for investors who have always been quite fond of EMs. We don’t really believe this will be a definitive move, but until good data comes from these countries we are going to be quite pessimistic, especially given the various elections that Brazil, India, Indonesia, South Africa and Turkey will be facing in the coming months. The outcome of these will once and for all prove these countries to be on the track of steady growth.
MSCI EM sell-off

Source: FT
In the wake of the EMs sell-off of the past month, we believe risk aversion will be the protagonist of the weeks to come. Investors are fleeing volatility and engaging in safer assets, mostly the U.S. and commodities. Even though we have seen some setbacks in the U.S. economy (retail sales falling the by most in 10 months), we are confident that this is a minor issue and that the pace of the recovery will not be greatly affected, given the fact there may still be some minor falls ahead.
The negative data from the Australian labour market on Thursday was a bad hit for the government which is striving to maintain credibility in front of parliament opposition, especially after December’s negative job reports. Thus, we think the ASP 200 will be hit in the coming week, losing ground with respect to Friday’s earnings which were the reflection of a good trading day in the US due to better than forecasted earnings. There may also be a depreciation in the Aussie Dollar but we remain cautious as the coming Sunday’s retail sales data may open up a slight upside momentum that may last a couple of days, but given the BoA’s position we keep on being bearish on the Australian Dollar until solid data (not concerning the house market) comes back in. Supporting our view is the BOA itself, that sees the AUD overvalued at the moment and is concerned about helping exporters boast their outgoing productions.
Most certainly the Aussie Dollar and the ASX 200 could be further pushed down by next week’s China data on PMI due on Thursday, which we expect to be negative slightly beneath the growth/contraction threshold of 50. In fact, Chinese data has strong effects on the rest of the EMs but especially on Australia.
In addition, we believe that China’s positive trade balance data was overestimated in January due to closure of markets in the last couple of days of the month: this forced producers and sellers to anticipate their orders thus distorting the figure. We believe the next trade balance data coming in on March the 8th will definitely be weaker and force the Asian markets down again.
What we suggest is to short the AUD and a good counterpart would be our beloved Sterling. New news coming in from the UK next week makes us think the currency will push its gains up once again especially with the unemployment rate data and January’s claimant count change due on Wednesday morning. As to hedging, a long position on the Dollar Index may be taken in order to outweigh possible positive rebounds on the Australian economy due to good data coming from the U.S. and from China on Wednesday afternoon.

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BSIC Market Recap 22|02|14 : BSIC | Bocconi Students Investment Club · 22 February 2014 at 13:03

[…] What has been and what might be […]

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