Wednesday, October 28, 2009

Midday Briefing for October 28th: Reversing the Risk Trade

We're seeing some unwinding of the "risk trade", in which portfolio managers betting on global growth buy commodities and emerging market stocks (as well as the currencies of the commodity-producing countries). Thus, we're seeing metals and energies weak among the futures contracts (top heat map from Barchart) and the Canadian and Aussie dollars weak, especially vis a vis the "carry" currencies of the yen and U.S. dollar. Seeing these intermarket relationships is helpful in gauging the likelihood of reversal vs. continuation of the downmove in the stock market. As long as risk assets are selling off pretty much across the board, stocks will tend to follow suit.