Convergence on the optimistic side: May 2012, the clocks strike together

Derivative

The extreme

For three months the house's two thermometers pointed in opposite directions: domestic confidence insisting on assumed risk, the intermarket structure walking down the stairs. May 2012 ended the disagreement — and ended it on the pessimistic side. The Perene Risk Index did not merely retreat: it plunged, from 78.5 to 18.8, finally crossing into aversion. At the same time, the dollar hit R$ 1.99, with a statistical deviation of 3.07 — the real at its most pressured in months.

What happened next

The convergence confirmed itself as a turn, not a hiccup. The domestic reading, which had been clinging to assumed-risk ground since 2011, capitulated to the side where the structure had already stood for months. By November 2012, the defensive picture had consolidated: the money was pulling its chips off the cyclicals and appetite stayed firmly in risk-off territory (20.6), despite a Selic at the bottom of the cycle, at 7.25% a year. The optimism that had held through the entire second half of 2011 did not return the following half-year.

What didn't happen

May's apparent relief was deceptive. Underneath, the ratio of cyclicals to defensives rose — which, read alone, would look like the return of appetite for cyclicals. But it was not: it was the real sinking to R$ 1.99 that inflated the price of commodities measured in local currency. What looked like rotation into risk was, in large part, a currency effect. And the discord did not resolve by the defensive structure recovering — it was optimism that gave way.

Honest verdict

When two clocks disagree for too long, convergence tends to come from the side that had more to lose. In May 2012, it was domestic optimism that capitulated — not the cautious structure that reconciled with it.

Continue the story: The 2011 European crisis as discord · When the gauges disagree · What the dollar as regime gauge is →

The Radar reads these regimes every day. See today's reading →

Characters: Flow (risk appetite) · Dollar · Structure (intermarket)