Looking For the Exits, Watching Risk Assets

Two quick notes this morning as bulls and bears stare each other down, wondering who flinches first.

The German IFO report, a measure of business confidence in that country, came in better than expected. According to Bloomberg, “The IFO Institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 90.5 from 87.4 in July.” Not only is that slightly better than the consensus of 89, it’s the highest reading since last September.

But the euro currency did not rally strongly on this news; this has me paying attention. Why? Because the euro is the biggest currency proxie for risk appetite right now. Yes, the Australian dollar and Canadian dollar have led the way on commodity reflation. But the euro is where the dollar free-fall should show up most, and it’s not.

The euro is only mildly stronger in this risk appetite/reflation trade. It has not been able to touch its early August highs just below $1.4450 (September CME Euro FX contract) and has steadily made lower highs since Friday’s rejected spike up to $1.4378. As of 9:00 a.m. Eastern, it has dipped below $1.43.

The other “indicator” I’m watching is large investors. I’ve been saying for weeks that equity fund managers have to chase this rally because they can’t afford to be underinvested at the earnings trough. They need to be buying ahead of the full recovery.

And as soon as they are mostly all in, this market can go lower. One large investor I pay attention to is Mohamed El-Erian, CIO of PIMCO with about $850 billion assets under management. Saw him on CNBC SquawkBox this morning and he said he is positioning for the pullback. Clearly, he’s been reading “Buy and Trade.”

"Mind the risk, bank the profits!"