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Nomura’s fixed income team reckon ‘risk on, risk off‘ is too simple.
In fact, they say the recent bout of QE2-inspired herding of risk is breaking down.
You can see the divergence, analysts Owen Job and Saeed Amen say, in the below charts of the bank’s proprietary measure of risk, the Gram+ indicator:
Gram+ looks at risk factors across capital markets, but in the first chart it’s broken down into separate regional/sector components. Until the September Federal Reserve statement, all those Gram+ components were moving in step. But since that day, emerging market and commodity risk measures have broken out.
According to Nomura, such a divergence is relatively uncommon. The difference between the two sub-indices is now persistently at levels last traded in 2003 and before that only during 1997, 1994 and 1993 — each time for less than five days.
What gives? The Nomura analysts have a theory:
The detail of this divergence reveals that much of it is a QE disturbance of assets. Asset repricings that historically imply a risk-negative sentiment, for example a rise in FX volatility (in USD crosses), have, because of QE impacts, occurred during a broader risk rally in EM and commodity risk metrics . . . Whether this divergence in risk sentiment assets can be sustained is questionable given the short periods for which similar divergences have been sustained in the past and the likely temporary impact of QE distortions. But to argue that the positive "risk-on" move since the announcement of QE has been subdued may be confusing QE distortions with shifts in risk sentiment and also missing the connection between EM and commodity outperformance and QE.
Full note in the usual place.
Related link: Risk on, risk off, risk on, risk off - FT Alphaville
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