How To Trade The Emerging Market Meltdown

Tyler Durden's picture

Over the past week we took our fair share of jabs at SocGen EM FX analyst Benoit Anne (the one who said "Governor Basci, You Have Avoided A Domino Crisis In EM"... er, oops?) . They were all in good humor - after all when it comes to sheer contrarian cluelessness nobody, and we mean nobody in the known world, can even reach Tom Stolper's toe nail, whose fades have resulted in over +12,000 pips on these pages alone over the past 5 years. Which is why we follow up the comedy with something more serious: now that the honeymoon is over, Anne has put together a solid compendium on how to trade the EM meltdown, with an emphasis on defensive strategies. Considering the tapering will continue for a long time, and as GaveKal explained yesterday, someone will have to lose (big) before EM normalcy returns, we urge anyone with EM exposure to read this.

From SocGen's Benoit Anne:

How to trade the GEM meltdown

In the face of stress escalating in global emerging markets (GEM), we are currently focusing on implementing defensive strategies. In EM FX, we sell high-beta EM FX outright or favour defensive relative value crosses. In EM rates, we are looking at front-end rates payer strategies, combined with bear flatteners, especially in markets that are subject to policy pressure contagion of the kind that has been observed in Turkey and South Africa. Finally, in EM Credit, we favour low-beta countries with strong balance sheets (low external debt and high FX reserves) as well as Central European countries; we also favour short-dated papers as sovereign curves are likely to steepen further.

GEM stress escalating

We have witnessed a severe escalation of stress in recent days in global emerging markets (GEM). The stress has travelled across all regions and spread to all asset classes. In a few markets, the volatility has reached levels that had not been seen since the fall of Lehman Brothers. We are clearly in the middle of a severe Doom phase, with no signs for now that this will turn around. There is no denying that we had not anticipated that magnitude of the correction. In many ways, what we are witnessing is a proper market meltdown.

Ramping up defensive strategies

Against this backdrop, it makes sense to go fully defensive in all asset classes. On the FX side, the strategy should be centered on either selling EM FX outright or at least favouring defensive relative value FX. In Central Europe, we have just entered a long EUR/HUF position, with a target of 329. So far, Central Europe has been relatively resilient, but we believe that this resilience is only going to be temporary. We have already seen EURPLN coming under mounting pressure. Given its higher-beta status in the region, the PLN looks vulnerable, in our view. In relative value, we continue to like short PLN/RON which has now moved to about 1.06. In the dollar bloc, we believe that the ZAR and the TRY are to be played on the short side, but await better entry levels.


In EM rates, we are observing a radical shift as regards the curve move momentum. While the defensive positions would typically be curve steepeners recently, we now believe that the momentum has gone to curve flatteners simply because an increasing number of EM central banks are victim to policy pressure contagion. The hedge fund community has taken on some central banks, primarily the CBRT and the SARB, whose credibility has been badly shaken.


We believe that this market pressure will spread to other candidates, with the National Bank of Hungary, and perhaps even the Central Bank of Russia now in the potential line of fire. On this basis, we are now looking at rates payer strategies, together with curve flatteners. In Mexico, we just entered a 1y TIIE payer, simply because we believe that investors may try to push Banxico. It does not mean that we think Banxico will actually hike, but any move in policy pricing expectations will help the rates payer performance. One of the few markets where we would actually be comfortable with a steepener is Brazil.


Finally in EM credit, we continue to like Romania $2023 vs. Hungary $2023. We believe the credit profile of Romania has substantially improved is well poised to show better resilience than other EMEA countries, in particular Hungary which continue to trade rich in view of fundamentals, in our view. Generally speaking, and at this stage of the crisis, we favour lowbeta names with strong balance sheet (low external debt combined with high FX reserves).


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slaughterer's picture

SocGen does not have a good FX/credit track record.  Just sayin'-  Watch your ass following this Benoit douche.  He might be the next banker suicide.

fonestar's picture

Well according to CNBC in spite of the world falling apart at the seams, we should remain bullish because Chipotle is rallying LOL...

gmrpeabody's picture

But the burritos are so good...

fonestar's picture

The weather is very bad out, more chili sauce?

stant's picture

How many burrito has to be sold to make for 4billion$ lost sales of f 18 fighters to brazil

Cannon Fodder's picture

Chipotle is already too expensive. If they raise prices I'll stop going there. Be here, there's no inflation out there....

ParkAveFlasher's picture

Yes but if they can finance renovation and rental of commercial restaurant space because of their size and connection, and there would be vacancy in said space if not for Chipotle swooping in, and if it would be the one reason for a family of four to pull into the local strip mall that would otherwise be weedy backlot of darkened windows, then it will be protected by TBTF, because it would then be a facet on the mesmerizing, spinning zircon bedazzlement device that is our centralized economy.

Herd Redirection Committee's picture

I bought a chocolate bar the other day, I had to do a double-take, to make sure it wasn't some sort of mini-Halloween version of said chocolate bar.

Al Capowned's picture

Cramer - Everything is a screaming buy

Al Capowned's picture

No Shit headline from CNBC



fonestar's picture


TheReplacement's picture

They can never take my bitgun, it's virtual!

National Blessing's picture

I often wonder why the poor never kill and eat the rich.  There are certainly enough of them to get the job done.  Go figure.

DontGive's picture

Why it's because the plantation is working out just fine for them...

whatsinaname's picture

There is only one strategy - BTFD.

Lewshine's picture

I'll tell you how to trade the EM meltdown - BUY THE FRICKIN SPY FUTURES - BEN IS A ONE DIMENSIONAL MORON!

maskone909's picture

how long until the pundits use this opportunity to announce "The US is the prettiest house in a bad neighborhood.'' or whatever that overused cliche is.  buy stocks! BTFD! all the way to zero!

Harbanger's picture

That's the whole point of this exercise, to get everyone into US equities where returns are "guaranteed".

fijisailor's picture

OK all you big FX traders, time to plow all those billions into the more solvent countries.  Let's see how they fare after a flood of funny money from Beny's helicopter.

Silver Garbage Man's picture

How to trade this?
Buy gold and silver and park it in a safe place and go back to sleep.

fonestar's picture

+1 ....(but try sprinkle some bits on top to really bring out that flavour)

slaughterer's picture

"In Mexico, we just entered a 1y TIIE payer, simply because we believe that investors may try to push Banxico."  

I will take the opposite side of that trade, Benoit.   That was your Stolper moment.

lasvegaspersona's picture

as long as they clear up that little 'derivative market' problem, there's nothing they can't handle. Yes Sir all good!

walküre's picture

How to trade the EM market meltdown? Seriously? Is "trading" potential global financial Armageddon the best advise here?

Run to your fucking banks and take your money out! Now! All of it! Convert as much as you can to precious! There is no fucking solution to any of this shit.

trending now #bankstersuicide

not trending #DreamsofMyRatherbeabankster

disabledvet's picture

buy gold. in doing so "you're not trading it at all." That would also include silver and copper as well...with the costs for refining thrown in. (That's the true all in cost.) Not all copper is created equal...the amounts in South America are staggering...but are "aggregate" (in the form of a powder) and half to be smelted in order to create the ingots. This is VERY energy intensive. The only places in the world that have this ability are in Germany, parts of North America (Pittsburgh being one of the biggest) and Canada as well. I think Norway has some big ones too. Russia too...but it's impossible to get anything in and out of Russia. This tremendous cold snap is driving up energy prices world wide. This will have a very positive impact on the US economy going forward into Spring. Extreme cold is very good for energy production (the energy comes out of ground very hot and has to be cooled...which is not hard to very tall "cooling towers" which separates the sweet from the sour and simply tap out the top to get the sweet gas) ....obviously this does require some possibly large up front capital but little in the way of energy to actually operate. The other thing is oil refining is a very "hot" the colder the area where the refinery is built the less energy is needed to turn the product into something useful (propane, diesel, heating fuel and least importantly gasoline.) Same is true for steel production, etc. Extreme cold increases production because it is cheaper. Another interesting concept going forward is in the battery space...chemical heat is a real problem for energy loss and "inefficient energy transference"...but in theory in very cold weather the battery should run much better. Can't say this is true...I have no data to support it actually...but it SHOULD be true.

walküre's picture

The natgas roundtrip was funny. They never give up, do they?

MrSteve's picture

The iron ore smelters in Pittsburgh have been closed for 20 years. We lived there when I saw them turn off the neon "pouring-action" sign that hung on the  face of the steelworkers' union building. It was a very big deal as it marked the end of steel making in Allegheny County. So minus one for having the Pittsburgh fact wrong. I'll skip to the end of your mostly very inaccurate and dead wrong contribution by pointing out that car batteries sometimes fail during a cold snap because of weak pH electrolyte, the acid in a lead-acid battery, so some battery technology "space" is not enhanced by colder temps. Save the fiction for Yahoo bulletin boards or someplace else- thanks.

buzzsaw99's picture

translation: vee ardh feeshing for value in zee em shpace

Dr. Engali's picture

Sooooooo..... buy gold. Got it.

disabledvet's picture

pretty much. "and a lot of other things."

energy is still dirt cheap in the USA..with massive amounts of production only now coming on line.

I would argue the form of actual SHIPS(but also barges) look very good here.

This is by far the most efficient way to transport goods in bulk...paper, water, fuel oil...all of this will be move via an actual ship in VERY large quantities in my view.

The USA has a long way to go to build out internal "shipping terminals"...but there is no place on earth with more coastline that the USA.

If Americans suddenly decamp "to the camp" (which is usually on a Lake or body of water) the amount of consumption could collapse and collapse dramatically inside the USA.

Talk about "stranded capital."
These are interest rates at one half of one percent on the thirty year.
I think this is exactly where the USA is headed...and quite possibly in a very short period of time (six months? a year?)

glaucon was right's picture

Shit, I live in Hungary. What now?

Bearwagon's picture

Stay calm, fetch your money from the bank regularly, and invest in something real. That does not has to be gold or silver, it can be also stuff like booze and cigarettes. Yeah, booze is always good ...   ;-)

glaucon was right's picture

I bought some gold (around 2000$ )

I think I will long EURHUF and buy gold with the profit. How to convert worthless fiat to gold 101

Bearwagon's picture

A little piece of land for a garden or recreation could come in handy, too.

Sziget's picture

I live in Hungary too. To everyone: don NOT touch the HUF, we have enough problems already!

glaucon was right's picture

Kezdek aggódni...remélem nem lesz hiperinfláció...

walküre's picture

sorry to say this but you will need USD as well (Turks are running into USD right now)

are mortgages in Hungary held in CHF like in Poland?

glaucon was right's picture

CHF mortages were banned in 2010.

Yeah, I am trying to decide to buy USD,EUR or CHF...or all 3.

hungarianboy's picture


By the way, don't worry about the mortgages here. The Hungarian goverment has currently set a floor @ 180. Not worrying here if HUF goes to 329. Why should I?

Al Capowned's picture

CNBC brings a new defnition to the term 'perma bull'

HardlyZero's picture

Perma Cramerection.  Ouch !

pragmatic hobo's picture

this time it's the sub-prime countries going belly up ...

mutty's picture

The big promo marco trade has been to short EM and long developed markets. I think it's crowded. EM bonds still suck, but EM stocks have already had the crap beaten out of them. I don't believe earnings numbers, but everyone else does, so fuck it.

EM could get a whole lot cheaper before it's all said and done, but i am bottom fishing.

I'm always fucking early so don't listen to me.

Going Loco's picture

I used to think that all this crap played a useful role in world trade and human prosperity and I used to worry that I didn't understand half of it. Now, I just think it's crap.

mutty's picture

It's gambling. IPOs and secondaries are the only thing that actually move capital into "productive" use. Yeah, I know IPO USUALLY a waste of capital, but compared to the capital flows between gamblers, it's a drop in the proverbial bucket, and it's the only drop with the potential to have any meaning for society.

I play the game but at least i know that it's meaningless gambling. Glad that someone else sees it for what it is.



zenon's picture

How to Trade the Emerging Maerket Meltdown:

Pick you levels and go long (when there is panick in the air)


Bunga Bunga's picture
'Dr. Doom' Roubini gets bullish on global economy

walküre's picture

Perfect contrarian indicator. He's been bearish from "green shoots" to "recovery" meme and is now turning bullish? Right. Is he afraid of his own shadow too?