Fra BNP Paribas:
The BNP Paribas global risk premium model suggests risk assets are nearing over-bought levels and that –all else equal– a pullback in the current rally (β) and/or increasing differentiation (α) across risk assets is therefore expected.
In the last week of May, the model signalled that investor risk appetite was critically low, indicating a potential appreciation in EM risk assets, and as a result we held our trade ideas to receive local currency rates in Brazil and Mexico and be long selected EM currencies, even after the US imposed tariffs on Chinese goods.
Our approach assesses short-term dynamics and is not used for structural calls. Our decision to enter 2019 fully-invested and to scale back positions at the end of January was based on it. Rates strategy: we closed the majority of our directional positions and switched into relative value or flattening trades in Brazil, South Africa, Hungary, and Mexico. We are paying rates in Colombia (5y IBR) and Chile (1y CLPxCAM). In FX, 65% of our long positions (CLP, BRL, and HUF) are against the EUR; only PLN and CZK are against the USD.