Ok, so either one of two things:
- traders tried and failed to find anything hawkish in Yellen’s Jackson Hole comments
- traders tried and succeeded to spin her comments as dovish in their minds
One of those two things has to be true, because the dollar is on the back foot:
Unsurprisingly, EM equities rose when Yellen’s remarks hit and that provides the perfect opportunity to remind you that emerging market stocks are sitting at a 3-year high:
Have a look at what the lira did this morning when the dollar fell as Yellen hit the tape:
As an aside, it certainly seems as though the lira might have considerable room to run despite worries about the country rapidly becoming a totalitarian regime. Yes, there are inflation concerns, but the lira’s REER looks like it’s two standard deviations below the 10-year average and Turkish stocks are up 40% YTD:
And to be sure, lots of folks thinks the EM party is set to continue.
Take Morgan Stanley for instance, who this week suggested clients should ignore Jackson Hole noise and “upcoming political turbulence” in the interest of “focusing on the positive realized data, central bank gradualism, and ample liquidity” as a rationale for why the EM rally has further to run.
Meanwhile, it’s probably worth asking if the outperformance is overdone. Have a look at the extent to which U.S. equities have underperformed EM YTD:
Short interest on the EM ETF is now sitting at ~4% – that’s down from more than 12% at the end of last year.
Anyway, fuck it. Draw your own conclusions, but do keep this debate in the back of your mind, because this is another one of those scenarios where everyone seems to be pretty damn sure that nothing can go wrong.