We went into September being reminded this is the cruelest month of the calendar year for markets. But to many this month is looking a lot like the other doom and gloom month of May, which ended up a lamb in kitten’s clothing. We say not so fast.
September is only 1/3 over and we are getting very real signals from the US bond market and the Dollar that last month’s head fake lower on rates was just that, a head-fake. Thus with that head-fake comes a table set for equity (Emerging Markets and developed) volatility that we have not seen in 6 months.
Remember the adages we have been professing for some time at Emerging Money: We believe volatility is returning (and has returned) in the form of the US Dollar and in interest rate expectations and realities. The rising Dollar and interest rates are not necessarily negative for the world and despite prevailing view for Emerging Markets, they don’t have to destroy emerging markets. We believe the foundation of the Dollar rise contains key ingredients for an emerging market rally and does not pose a major threat to global asset prices. This dollar rise is not a flight to quality. This Dollar rise is the old fashioned kind of move when there is growth and where the Fed may have to adjust overly accommodative rates. Historically this is a backdrop to rally commodities and Emerging Markets. We watch the 5yr part of the US treasury curve for our lead. At the same time risk assets are already uncomfortable and moving with significant volatility in advance of actual change by the Fed on their long term interest rate policy.
Equities overall can rally with higher FF rates and lower inflation if this is what we indeed have. Our call is that there will be some discomfort that comes with a change in the Fed language3 next week at the September 16th FOMC meeting but that after the early impact of the Fed language there will be a comfort zone that can settle back in built off a combination of still uber low rates, and a confidence that Fed will error on moving too slow rather than too fast.
We have advocated a trading call in the $TBT (3X long end UST) as this is a vehicle that is inefficient to buy and hold and has significant capital erosion if help beyond a 30d period. TBT today traded through the 50mda and we look to test $62.00 level through the Fed meeting. Your sop level would be 56.80 or the trend line support for the recent move. EEM levels to watch are to $44.00 and $43.25. These are levels to nibble back into a market that has been selling off since last week directly in correlation to the move higher in rates and that of the USD.