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Getting Ready for a Euro Carry Trade
The beneficiaries of any emerging Euro carry trade -- higher-interest-rate developed markets -- will cause inflationary pressure in emerging markets. But don't expect the ECB's Draghi to lose sleep.
Howard L. Simons     

Mario Draghi is determined to weaken the euro, and if we've learned anything about the European Central Bank president, it is that, like Lola, what Mario wants, Mario gets -- and with an economy of effort. His "whatever it takes" statement in July 2012 marked the start of stability in the euro and a major compression in sovereign credit spreads of countries such as Spain and Italy. But unlike the Federal Reserve or the Bank of Japan, he has yet to conjure up trillions of euros to effect his actions.
 
The Euro Rate Gap

It might come as a surprise to Americans who've come to take a perverse pride of sorts in having some of the cheapest money on the planet, but the three-month interest rate spread between the USD and EUR started to reverse on December 6, 2013. However, if you borrowed the euro to lend into the dollar, you would have lost 1.09% thanks to the euro's spot rate gain.
 
Let's ask ourselves what a world with a functioning euro carry trade would look like for dollar-domiciled equity investors, a category likely to include you. If we map the total returns in USD terms for the MSCI Barra US Index relative to their World Ex-US Index over the post-March 2009 QE era and re-index everything to December 6, 2013, we see that the US spent the entire October 2009-May 2013 period outperforming the rest of the world in USD terms. That period corresponded to the onset of the eurozone sovereign debt crisis at the start and the beginning of taper talk in the US at the end.


Click to enlarge

The past year has been a bit of a relative performance roller coaster: The US underperformed going into October 2013, outperformed going into December, and has underperformed the rest of the world afterward. We get pretty much the same narration if we express all of this in local currency terms.


Click to enlarge

Where Will the Money Go?

The key question, as the paragraph header states very clearly, is: Where will the money go? The glory days of the yen carry trade (2004-2007) saw cheap yen going to finance equity booms elsewhere in the world -- emerging markets especially. The dollar carry trade between March 2009 and October 2010 also propelled emerging markets higher. If you're starting to sense a pattern here, you're correct: A euro carry trade will involve those cheap euros flooding into higher-interest-rate markets around the world. This is what cheap money does.
 
The chief beneficiaries of any emerging euro carry trade won't be the eurozone or Japan or the US, but rather higher-interest-rate developed markets such as Canada, Australia, and New Zealand, as well as emerging markets such as Turkey, India, and Brazil. Will this cause inflationary pressures in the emerging markets? Yes, of course -- that's what cheap money does. Will Mario care? No, that's what central bankers do not do.
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No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

More From Howard L. Simons
Getting Ready for a Euro Carry Trade
The beneficiaries of any emerging Euro carry trade -- higher-interest-rate developed markets -- will cause inflationary pressure in emerging markets. But don't expect the ECB's Draghi to lose sleep.
Howard L. Simons     

Mario Draghi is determined to weaken the euro, and if we've learned anything about the European Central Bank president, it is that, like Lola, what Mario wants, Mario gets -- and with an economy of effort. His "whatever it takes" statement in July 2012 marked the start of stability in the euro and a major compression in sovereign credit spreads of countries such as Spain and Italy. But unlike the Federal Reserve or the Bank of Japan, he has yet to conjure up trillions of euros to effect his actions.
 
The Euro Rate Gap

It might come as a surprise to Americans who've come to take a perverse pride of sorts in having some of the cheapest money on the planet, but the three-month interest rate spread between the USD and EUR started to reverse on December 6, 2013. However, if you borrowed the euro to lend into the dollar, you would have lost 1.09% thanks to the euro's spot rate gain.
 
Let's ask ourselves what a world with a functioning euro carry trade would look like for dollar-domiciled equity investors, a category likely to include you. If we map the total returns in USD terms for the MSCI Barra US Index relative to their World Ex-US Index over the post-March 2009 QE era and re-index everything to December 6, 2013, we see that the US spent the entire October 2009-May 2013 period outperforming the rest of the world in USD terms. That period corresponded to the onset of the eurozone sovereign debt crisis at the start and the beginning of taper talk in the US at the end.


Click to enlarge

The past year has been a bit of a relative performance roller coaster: The US underperformed going into October 2013, outperformed going into December, and has underperformed the rest of the world afterward. We get pretty much the same narration if we express all of this in local currency terms.


Click to enlarge

Where Will the Money Go?

The key question, as the paragraph header states very clearly, is: Where will the money go? The glory days of the yen carry trade (2004-2007) saw cheap yen going to finance equity booms elsewhere in the world -- emerging markets especially. The dollar carry trade between March 2009 and October 2010 also propelled emerging markets higher. If you're starting to sense a pattern here, you're correct: A euro carry trade will involve those cheap euros flooding into higher-interest-rate markets around the world. This is what cheap money does.
 
The chief beneficiaries of any emerging euro carry trade won't be the eurozone or Japan or the US, but rather higher-interest-rate developed markets such as Canada, Australia, and New Zealand, as well as emerging markets such as Turkey, India, and Brazil. Will this cause inflationary pressures in the emerging markets? Yes, of course -- that's what cheap money does. Will Mario care? No, that's what central bankers do not do.
< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

More From Howard L. Simons
Daily Recap
Getting Ready for a Euro Carry Trade
The beneficiaries of any emerging Euro carry trade -- higher-interest-rate developed markets -- will cause inflationary pressure in emerging markets. But don't expect the ECB's Draghi to lose sleep.
Howard L. Simons     

Mario Draghi is determined to weaken the euro, and if we've learned anything about the European Central Bank president, it is that, like Lola, what Mario wants, Mario gets -- and with an economy of effort. His "whatever it takes" statement in July 2012 marked the start of stability in the euro and a major compression in sovereign credit spreads of countries such as Spain and Italy. But unlike the Federal Reserve or the Bank of Japan, he has yet to conjure up trillions of euros to effect his actions.
 
The Euro Rate Gap

It might come as a surprise to Americans who've come to take a perverse pride of sorts in having some of the cheapest money on the planet, but the three-month interest rate spread between the USD and EUR started to reverse on December 6, 2013. However, if you borrowed the euro to lend into the dollar, you would have lost 1.09% thanks to the euro's spot rate gain.
 
Let's ask ourselves what a world with a functioning euro carry trade would look like for dollar-domiciled equity investors, a category likely to include you. If we map the total returns in USD terms for the MSCI Barra US Index relative to their World Ex-US Index over the post-March 2009 QE era and re-index everything to December 6, 2013, we see that the US spent the entire October 2009-May 2013 period outperforming the rest of the world in USD terms. That period corresponded to the onset of the eurozone sovereign debt crisis at the start and the beginning of taper talk in the US at the end.


Click to enlarge

The past year has been a bit of a relative performance roller coaster: The US underperformed going into October 2013, outperformed going into December, and has underperformed the rest of the world afterward. We get pretty much the same narration if we express all of this in local currency terms.


Click to enlarge

Where Will the Money Go?

The key question, as the paragraph header states very clearly, is: Where will the money go? The glory days of the yen carry trade (2004-2007) saw cheap yen going to finance equity booms elsewhere in the world -- emerging markets especially. The dollar carry trade between March 2009 and October 2010 also propelled emerging markets higher. If you're starting to sense a pattern here, you're correct: A euro carry trade will involve those cheap euros flooding into higher-interest-rate markets around the world. This is what cheap money does.
 
The chief beneficiaries of any emerging euro carry trade won't be the eurozone or Japan or the US, but rather higher-interest-rate developed markets such as Canada, Australia, and New Zealand, as well as emerging markets such as Turkey, India, and Brazil. Will this cause inflationary pressures in the emerging markets? Yes, of course -- that's what cheap money does. Will Mario care? No, that's what central bankers do not do.
< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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