Positioning for the risk-on

Will the Fed really be able to carry through with its pledge to begin “tapering” QE from this autumn? Almost certainly not. This means that the higher yields being paid on US debt represent a buying opportunity. 

It also means that the present moment is a good time to seek exposure to emerging market assets. Ditto for some of the hard-hit commodities (and miners) and, gulp, gold.  Basically, it will soon be time to position oneself for the risk-on trade. We probably haven’t reached bottom yet, but I suspect we’re not far away. Very intuitively, I would guess August 15 at the latest. Why? Because once we’re much beyond August, the markets will surely start doubting the Fed’s nerve. Combine this with some kind of big reflation from China, and you have the makings of a big reversion to the de-coupling / risk-on theme. 

What if China’s reflation effort comes in the shape of an RMB devaluation? What that implies for the dollar is not good. In fact, the greenback is already uncomfortably rising. Does the Fed want to accentuate that rise with a tightening? Unlikely. 

This post was motivated by the FT headline, “US bond yields soar on robust jobs growth“.
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