Way back… errr… way back “yesterday,” we showed you the following chart from Deutsche Bank’s Aleksandar Kocic which diagrams all of the ways a Fed hike can trigger transient bouts of volatility across markets:
There’s a lot going on there, but one of the most obvious concerns is that DM policy normalization will trigger an unwind in the carry bonanza that’s helped propel everything with an “EM” prefix into the stratosphere (that’s hyperbolic, but you know, it’s Heisenberg, so what do you expect?)
Needless to say, EM turmoil can pretty easily come back around and bite DM markets. That possibility was in part responsible for the Fed’s cautious stance in the wake of the yuan devaluation two years ago, an event which was directly responsible for the chaos that unfolded on August 24, 2015.
There are all kinds of folks who will tell you why “this time is different” for EM and how the space is better prepared to digest a more hawkish Fed than it has been in years past. It’s Friday and that means no one wants to think to hard, so rather than subject you to a diatribe on this, we thought we’d just show you the following chart from BofAML’s latest FX and sentiment survey. Have a look:
As the bank writes, there’s been “a significant increase in investor concern that the carry trade unwind will trigger increased volatility in the rest of the year.”
And the punchline: if that plays out, there’s only one thing to do…
Tried and true. Never fails…