Article / 24 August 2015 at 0:12 GMT

The Macro Take: From emerging markets selloff to stealth crisis

Global Macro Strategist / Saxo Bank Group - Singapore Hub
  • Volatility index up 120% while S&P, EuroStoxx and Topix all suffer huge drops
  • SHCOMP -11.5%, HangSeng -6.6%, Kospi -5.4%, DXY -1.6%, gold up 4.2%, oil -4.8%
  • The week ahead will see the equity markets trying to find their legs
  • With just 23 days to September 16, the USD squeeze can't last much longer

By Kay Van-Petersen

Live from the Asia Pacific!

A very good morning to everyone and wishing you all a positive, uplifting and most importantly profitable week.


So in case you’ve been under a rock, that’s what we call a selloff…

With the VIX rising about 120% for the week, equity markets took quite a beating over last week, including the US (finally!), as well as the Eurozone and the Asia Pacific. The S&P 500 fell 5.8% EuroStoxx down 7.0% Topix down 5.5%, Shanghai Composite tumbled 11.5% HangSeng down 6.6%, Kospi fell 5.4%, DXY down 1.6% gold was up 4.2%, while oil lost 4.8% (we broke $40/barrel). Another week of this and it will really be blood on the streets – albeit for some stocks and markets, you could probably make a case that we are already seeing blood on the streets.

Remember it is summer in the northern hemisphere and a lot of people are still away from their desks, but I think the market will try to rally this coming week. The Friday USD squeeze could carry on for the next one to two weeks, before attention switches back to the September 16 Federal Open Market Committee meeting – which should see the first Federal Reserve Bank hike in close to a decade. But remember already on September 4 (next Friday) we will have August US nonfarm payroll figures due.


Gold has defied the rout, but that's because of its safe haven status
rather than any general commodity bounce. Photo: iStock

In the meantime that USD squeeze could give commodities some breathing room, as well as technical correction. Gold has done well, but I believe that is more as a function of safe haven status and risk-off sentiment (like the Swiss franc and the Japanese yen), rather than a general commodity bounce (no substitute for timing as it seems Druckenmiller went long gold big time). My take on this USD squeeze is that it is one last gasp for air before the Fed puts the nail in the coffin. And it would be great if we could get that tactical bounce back on US equities as well.

The best traders are long when they are bullish and short when they are bearish – that is, they have on a position that expresses their view, whether it’s a nano position or going for the jugular position.

The brilliant traders plan ahead, they already know what they are going to be buying when the market has a technical bounce (US airlines, financials, high beta names, short US Treasury futures, etc). They also know where to go if the selloff continues, things that have been lagging this drop like the high yield index, HYG or EMB, the JP Morgan USD EM Bond ETF.

HYG and EMB have has been holding up quite well against the SPX – for now…

Chart: Bloomberg. Create your own charts with SaxoTrader; click here to learn more. 

Relative value performance of HYG versus SPX. Note very recent breakdown

Chart: Bloomberg
What’s interesting is from a percentage pullback basis on US equities, we’ve already matched the October selloff in the Nasdaq and Russell, with the S&P still needing a further 2.3% contraction. If we were to get back to those nominal levels though, then there is a lot more pain and people may finally get the much coveted 10% pullback in the S&P 500. Whether they will want to get in or not, is another question entirely.

Almost there percentage wise, but we still quite a bit to go in terms of levels

Chart: Bloomberg

EM selloff, EM crisis

What people don’t fully realise is that we are not only in an emerging markets selloff but the initial phase of a stealth EM crisis.

I say stealth because of the epic events we have been having this year, from the oil price drop to the Swiss National Bank peg drama, to Russia-Ukraine-Europe, to the European Central Bank, to Greece, to China devaluation and slowdown. And now to the Fed.

Currently the market is fully focused on the potential Fed hike in September (especially given minutes that were read as a lot more dovish last week) and what exactly a lower yuan means for China and the world in general. There is no bandwidth left to take a look at what is happening in emerging markets . And once we get the first hike in and people look up, we’ll potentially be in absolute free-fall in emerging markets – yes, it will get worse.

Look at these charts on emerging market ETFs (EEM and EWM - that's the Malaysia ETF) that I tweeted out earlier this week – multi-year key levels have been completely smashed on both. 

EEM and EWM long-term performances

Chart: Bloomberg

One of the big five themes I had put out on my Macro Rosetta stone piece (entitled The Big Picture Part 2: Commodities heading for sustained bear market) at the end of July was 4: EM meltdown. The thesis behind this investment theme of being short EM especially those in the cross hair vortex of a combination of a stronger US dollar impacting their debt levels (both government and corporates which will lead to an eventual credit crunch), falling commodities impacting their exports, heavy foreign ownership, as well as domestic political & fiscal turmoil – I flagged at the time that Malaysia and Brazil were the poster children for this.

Now to add to Asia EM woes (and China exporters in general), since then we’ve had China initiate what is going to be a structural devaluation of the Yuan. So all of a sudden on top of the four or five structural headwinds that these countries had to contend with, now one of their biggest partner export markets – if not their biggest export market for the likes of Taiwan and South Korea – is devaluing their currency.

That is what China is gaining in exports, you as an importer into China are losing. Let me put it another way, if the USDCNY devalues by 15-30% over the next two years, that’s a 15-30% currency tax that South Korea, Taiwanese, Malaysian and Brazilian exporters will be hit with. So things just got significantly tougher.

Also with China being a major destination for commodities around the globe, well yes, you guessed it, give those commodities a haircut. And what happens when the largest commodity consumer, sets the price lower by 15-30%? Yes, you guessed it, the global price of that commodity starts to move lower by 15-30%. Then what happens when commodity prices sink further and you rely on them for exports – I think you can see the negative spiral from this.

And from my perspective, I just cannot see light at the end of the tunnel on a six to 12 month perspective. The boom “summer” years of high commodity prices allowed a lot of EM governments to coast along, largely ignoring much needed reforms and structural changes. There needs to be an adjustment & it has to get a lot worse before it get better.

I ask myself, what should bring commodities roaring back, or just help them find a floor? Is it global growth picking up? Not likely. The Fed not hiking? Even if the Fed does not hike (and I still very much believe it will), the USD is still going to be the strongest piece on the board as everyone else continues to print money – it will strengthen by default. Will it be the EM governments putting forth structural reform and with foresight that the boom years are over? Yeah right.

Hence from my perspective, until I can get data / facts that things are getting better – I think the momentum is very much to the downside & we are in the makings of a very unique EM crisis. Yes, we could be due for a technical bounce, but use it to position for the downside.

SOME EM and APAC ETFs for this theme

EEM – Emerging Markets ETFs
EWM – Malaysia
EWT – Taiwan
EWY – South Korea
EIDO – Indonesia
THD – Thailand
EWA – Australia
EWZ – Brazil
TUR – Turkey
RSX – Russia
EZA – South Africa

A long DM (Japan, Eurozone) versus short EM strategy is going to make sense for a long time. For those looking for EM markets to “hide”, on a relative basis India, Mexico and the Philippines should fare better. In my mind South Korea, Malaysia, Australia, Brazil, South Africa, Russia are still holding up remarkably well. Particularly South Korea and Malaysia.

Have a lot more to talk about: Fed, Oil, US airlines, Australia, etc… but I’ll save that for a Matrix piece.

Reflections, rants and other stuff

A few things of note…

Climate change warrior Soros warms up on coal

Soros, Macro investing legend & climate dude, investing in coal? That space has been the epitome of bombed out with some names down around 99% and others going bust. KOL is the coal ETF. No view here, but worth some work and it does not get any more contrarian – ie let me pick the worst asset class out there, then pick the worst piece of that asset class.

Taiwan bans short selling below previous session prices

Taiwan’s regulators bans short selling on stocks, one cannot short a stock at a lower price than previous day’s close. This should come into play today. The attempt here no doubt is stabilize the market which whilst only down 16% on the year-to-date, must have them worried given Friday’s session in the US, Eurozone and of course China. By the way, EWT is the Taiwanese US-listed ETF with options.

The EM meltdown is accelerating people, remember 2008? Governments banning short-selling is a great gauge of stress in the system. Expect this to become thematic over the rest of the year.

Kazakhstan floats tenge, currency tumbles

Yes, last week we had not one, but two devaluations (that I saw anyway) One was the Vietnam dong and the second the Kazakh tenge. Again expect this trend to continue, who else is left out there with a peg or dirty float against the USD?

Greece crisis: PM Alexis Tsipras quits and calls early poll

I seem to recall a rather dashing and astute macro man out there saying it would only be a matter of time before both the prime minister and finance minister left. Well we had the last one quit last week. I still stand by my view that they leave the Eurozone by summer 2016 - let's see. 

On the homefront…

Had a great tour seeing more of Singapore over the weekend, as a mate and his lovely wife showed us some sights that as an expat you are not going to come across easily being new to a country. Very grateful for that. We ended the tour with some much needed feasting at Café Melba which serves a top-notch brunch, great place. 

Profitable trading everyone.

Key macro data points to watch over next week*

Speakers/Other: Aug 24 – Sun Aug 30

Fed Speakers – Lockhart (August 25), Dudley (August 26),
Other Speakers – RBA’s Stevens (26), Note Fed’s Jackson Hole (27-30), BoE’s Carney (29),

No major central bank meeting scheduled / minutes due

MEETINGS NEXT WEEK: Monday Aug 31 – Sunday September 6
RBA 2.00%e 2.00%p (September 1), Brazil 14.25%p (2-3), ECB -0.20%p (3)

Economic data flash

Lastly, life is very similar to investing/trading, you end up with what you put up with – so set your standards high, focus on the process and a profitable trading/investing to you all – be successful and don’t forget to enjoy the journey.

The effective use of our time is the most valuable commodity we have.

– Edited by Robert Ryan

Kay Van-Petersen (KVP) is Asia Macro Strategist at Saxo Bank, the home of social trading. In addition to, please follow him on twitter @KVP_Macro.
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