Street.Com – Global central bankers served up a cocktail of coordinated tightening Thursday, leading to dislocations around the world that featured falling commodities markets and a rising dollar. The stock market’s late-day rebound took some of the sour taste from traders’ mouths. But Thursday’s volatile action globally shows the downside of risk rebalancing as several “winning” trades have become losers.
“You have the perfect storm going on,” says David Greenwald, partner at Scalene Partners, a currency-focused hedge fund. “The driver here is world interest rates,” and people are getting pummeled by positions they put on at the end of May.
The most-damaged positions included being short volatility, going long the euro vs. the dollar, long the yen and long Asian equities. None of those trades are working, as investors watch their other leveraged investments in commodities, emerging-market and high-beta U.S. equities slip away as well. The U.S. stock market’s recent gyrations only point to the volatility such unwinding creates.
“That is a bad scenario … that is a potential 1997 scenario,” says Greenwald, referring to the so-called Asian contagion that roiled financial markets until (and definitely including) the Russian debt default and collapse of Long Term Capital management in 1998.
