Presented in all its incredulous glory, SocGen's EM desk shock at the sheep-like ignorance of investors into the PSI and NFP...
I have tried my best to remain relatively bullish towards global emerging markets (GEM) over the recent period despite the global risks, but even by my bullish bias standards, today’s move is simply stupid. EM assets are rallying with a vengeance today, but the timing of that move is just wrong, in my view. Why now, ahead of a massive event risk, namely the results of the PSI released tonight?
It is still unclear whether the outcome for the PSI is going to be a market-friendly one, and in any case, it is not going to be a straight-forward one to interpret for global investors either given the rather complicated structure of the deal. We basically have some serious disappointment doubled with some uncertainty. So unless EM investors know something I don’t—which would indeed make me stupid—today’s move is at best premature and quite a bit far-fetched.
I am happy to participate in this EM rally on Monday morning, once we have got confirmation that the PSI outcome was favourable and that the NFP was risk supportive. But I do not see any reason to make that call just now. Maybe, after all, EM investors feel so great about the world that they have decided to ignore the short-term global risks. All EM high-beta currencies are doing particularly well, even the lame duck of Central Europe FX, the forint, which still has its fair share of fundamental issues. For the puzzled investor, today’s move is going to provide a great opportunity to reload on those defensive hedges..