AUD, CAD, SEK and NOK are also weak, JPY and CHF strengthen = risk-off
I have been waiting a long time this year for a pronounced correction. This has been a long time coming after the sharp interest rate hikes of recent years.
The AI hype has long overshadowed the burdens and led to valuation levels that are absurdly high and also massively increased the risk appetite of market participants.
The leverage with which investments are made has increased along the way, CHF and JPY are the carry currencies with low interest rates for loans in these currencies, which were often invested in bonds from Mexico, Brazil or other high-interest countries.
Smart Money Takes Profits
Valuation excesses are easy to pinpoint, but the exact end of a trend is not. Smart large investors often pursue clear goals and act in a systematic and disciplined manner.
Valuation excesses are easy to pinpoint, but the exact end of a trend is not. Smart large investors often pursue clear goals and act in a systematic and disciplined manner.
Bond interest rates at the long end began to fall almost a month ago, a fact that I took advantage of in liquidity management by extending the average duration. This generates additional income when interest rates fall.
If there is “profit-taking and covering of carry trade financing” across the board, a risk-off is in the making. I expect the stock markets to correct by 15% – 20% and the EM currencies mentioned above by up to a further 10% – 15%.
I expect lower losses for IDR and INR because both currencies are managed to a certain extent.
The Possible Drop Depth is Enormous, but Currently Seems to be Limited
It usually takes more than the withdrawal of some smart money for a market panic to break out. There are still no convincing external factors that should make market participants shudder. All assets that are being sold (or bought) today have (not only this year) shown an extremely strong development into strength (CHF & Yen into weakness) in the last year, which is now being corrected.
This is normal after such a development and usually ends with the end of profit-taking by smart money investors. I assume that we will continue to see selling pressure until mid-September, but that the fundamentally positive development of the real economy, which started in Asia, will continue and contribute to more demand.
I therefore expect the constructive trends to resume once the current correction has ended.
A Crash Cannot be Ruled Out, Although it is Unlikely
EM countries are fundamentally stronger today than they have often been in the past. This leads me to expect that the current market correction is just that – a correction.
However, if upheavals were to occur in our Western economies that are not currently recognizable, but are fundamentally possible, a conflagration would be possible at any time.
I currently see little willingness in Treasuries to devote space and energy to this topic because there is “nothing” going on. At the beginning of the year, I promised my readers a boring first half of the year and I was right. However, I can now see that the “boring” trend is reaching its limits and, as can be clearly seen in the chart below, something stressful is beginning.
Significant downward trend in seemingly unrelated currencies since the end of June. There is much more to come, at least until the end of the summer. Opportunities will subsequently arise for the currencies that have fallen significantly by then.
