Thursday, March 17, 2016

"Yellen's Emerging Markets Bear Trap"

From Bloomberg Gadfly, Mar 16, 2016 10:50 PM CDT:
Be on the lookout for a quick run-up in the prices of emerging-market assets, courtesy of Janet Yellen.

Bears, not bulls, will drive this rally, though. Much of the gains will be triggered by investors paring bets against developing nations.The March fund manager survey of Bank of America Merrill Lynch concluded that the three most crowded trades were shorting emerging markets and oil while betting on a stronger dollar. All three are now in danger and anyone who still is in that position will probably try to get out while they can. The survey's answers were received in early March, so the 13 percent rally this month in Brent futures, the 2.5 percent drop in the trade-weighted dollar basket and the 8.7 percent gain in the MSCI Emerging Markets stock index may be partly explained by a reversal of these trades.

Given that bond traders were pricing in a more hawkish Federal Reserve stance, any shorts left out there will  be running for cover now that the U.S. central bank has scaled back forecasts for higher interest rates. That could mean another leg up, especially for emerging market assets, which benefit doubly from a weaker dollar and rising commodity prices.

Adding fuel to the fire are the high cash balances held by funds as of March. On average, funds had 5.1 percent of their assets in cash, down from 5.6 percent in February but still higher than usual, according to the Merrill Lynch survey. With the end of the quarter approaching, portfolio managers will be hard pressed to catch the rally in time to show positive performance for the reporting period. They can't afford to sit on cash which, in some markets, earns negative interest rates....MORE