We have had a huge short covering, buy the stimulus rumor run up in China, and by extension, most of the emerging markets. The crowd did get pessimistic on China a couple of weeks ago, but it definitely wasn't panicky or fearful. And with such an entrenched downtrend, I figured that any bounces would be shortable. The bounce was a bit stronger than I expected, but it seems to have played itself out. We got back to the regular scheduled programming and H-Shares in Hong Kong underperformed.
I expect China to continue its relative weakness over the coming weeks. The debt default news are coming out on a regular basis now. The cat is out of the bag, there is no way to put it back in until you get a panic bottom. Sustained inflows will not come back to emerging markets for a long time.
I have not shorted emerging markets yet, because I still believe the US market should rally for a few more days. It is too dangerous to try to catch the last little bits of this rally, but I also don't want to short too early. So I am neutral, looking to put on a short China/emerging markets position soon, as well as a long position in Treasuries. Probably later this week or early next week.
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