Global markets are going wild today. The big bet against the Japanese yen is unwinding, and the dollar is getting crushed against a host of currencies around the world (the dollar index is down a sizable 1.3%).
Many of these currencies come from emerging markets (EM), which have been tanking over the past few weeks against the dollar as U.S. Treasury yields have risen.
And the losses in EM haven’t been limited to currencies – stocks and bonds have taken a hit as part of the EM sell-off as well.
The big sell-off in the dollar today is a reversal of this trade. Now, everyone is looking ahead to tomorrow’s jobs report in the U.S., which could be a crucial release in terms of determining which way the momentum in global markets swings.
Will a better-than-expected jobs number confirm the strengthening dollar story of the past few weeks, or will a worse-than-expected number provide more fuel for the dollar sell-off as fears that the Federal Reserve will have to remain accommodative for longer begin to seep back into the marketplace?
Société Générale Head of Emerging Markets Strategy Benoît Anne asserts that either way, it doesn’t really matter for EM.
In a note to clients today, he writes:
No matter what happens tomorrow, sell GEM assets
Global investors await the release of nonfarm payroll tomorrow with great anticipation. However, we do not think that the NFP is a game changer and we will not alter our bearish strategic view on global emerging markets. We nonetheless recognise that there may be a tactical opportunity to actively trade GEM assets in the event of the soft labour report.
Fast-money investors may indeed elect to participate in the risk rally but the rally will likely be short-lived. Ultimately, fade that move and re-establish core bearish positions. In other words, it is all going to be about timing and execution but the end-result strategy is the same: sell GEM.
Our bearish view on GEM is strategic
We no longer think that tomorrow’s nonfarm payroll is a game changer for global emerging markets (GEM) and therefore do not overplay its market significance from a big-picture standpoint. The only scenario which would cause us to revisit our core views would be a NFP print that would fall below 50k. Such a low number would indeed cast some major doubts about the likelihood of a speedy rush to the policy exit on the part of the Fed. But this is clearly a tail risk to watch for at this point, with a low probability.
A higher NFP print than 50k will not change our core view on GEM, which is a strategic one. Over the next few months, we indeed believe that GEM assets will correct in a major way, driven by anticipation of Fed exit and the associated correction in US Treasuries. The major risks for local rates markets include the shock to risk appetite, the heavy positioning, and the sharply deteriorating local liquidity conditions. On the FX front, the strong USD has been a major force, but we are also concerned about the poor EM FX fundamentals including the combination of weak growth and monetary policy easing. In most cases, EM central banks have adopted a fairly relaxed approach towards the recent weakness, suggesting that the moves were not deemed unwelcome.
SocGen’s house view is that non-farm payrolls will come in at 210,000, well above the consensus estimate among market economists for a gain of 163,000.
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