Diary of a Financier

Reengaging the Emerging Markets Multi-Asset Arb

In Capital Markets on Fri 24 Feb 2012 at 18:07

I’ve posted a string of StockTwits about Emerging Markets:

  • EMs has to deal w inflation again as developed world reflates. I might put on my long $EEM v short $EMB trade again a la 2010 post QE2. Feb. 3 at 4:07 PM
  • Followup: EM inflation is picking up as I expected; China inflation +4.5% y/y v. 4.0 expected. Buying more $EEM $FXI Feb. 9 at 8:32 AM

I have a small allocation to this long/short pair right now. I’m not net neutral on it as I’m currently overweight the long EEM leg. I’m preparing to fully allocate my stake and eventually net-out my exposure: long Emerging Market Equities (EEM) and short Emerging Market Bonds (EMB).

Recall that I rode this same trade on the same [reflationary] premise last year between November 5, 2010 and January 6, 2011. I’m particularly fond of the risk-adjusted profile offered by this long/short, global macro-capital structure arbitrage. Like the majority of global capital markets, the analogue to 2010 fits snugly:

EEM v EMB- 2010 analogue says EEM about to outperform.

Piling on, ZeroHedge just chimed in with a good note on EM inflation:

Asia-Pacific Tapis Crude Oil tends to be the benchmark grade for oil and gasoline pricing throughout AsiaPac. As WTI cracks $109, the Tapis crude spot price has just seen the largest 3-week rise since last February and is back to July 2008 highs – over $134. In dollars. This seems like perfectly bad timing for China’s RRR cut last week, just as real inflation starts to flare in the real economy




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