Friday, May 21, 2010
When it's time to delever, discipline suggests cutting the losers and keeping the winners. Except it rarely works out like that - the winners bail-out the losers until the pain gets too ball-crunching and then a wholesale dump of everything in the book is inevitable. A lot of the moves yesterday, overnight and this morning are very suggestive of this capitulation point being reached as even the market's favourite whipping boy, the Euro has rallied 4% from the lows on Wednesday. There aren't any Pink Flamingos left.
Yesterday had the feel of "throwing out the baby with the bath water". A few metrics in particular seem to point to many portfolio managers and traders getting the "tap on the shoulder" from superiors telling them to cut their losses. A 20bp move in TIPS breakevens and $7 collapse in Oil are all symptoms of Inflationistas throwing in the towel and converting to the religion of European deflation. Oh dear.
Baby and bath water indeed...