27. July 2016 16:49
If the last twenty five years underscore just how much capital flows matter to markets, then the last two years have seen the build-up of four big trends that are not getting the attention they deserve. As these trends reverse, they will have major implications for markets. Each anomaly represents an ‘elephant in the room’ for investors. Just for starters, we figure that bond prices could tumble, the US dollar skid lower and EM significantly outperform Wall Street.
15. July 2016 15:45
This is a ‘sit-up-and-think’ moment for Emerging Market allocators, according to latest Liquidity data. After more than five years of lacklustre EM, investment returns triggered primarily by poor liquidity conditions and correspondingly high risk, the future is looking far, far better. The key reason is the significant recent improvement in both the quantity and, more importantly, the quality of liquidity flows to EM. Not only have both foreign investor net inflows and domestic private sector liquidity jumped higher (virtually across the geographic spectrum of EM), but the currency-sapping dominance of EM Central Bankers has taken a step backwards. Therefore, looking ahead, foreign interest in increasing in what are fast-becoming more healthy, cash-generating economies, with the prospects of greater future currency stability.
30. June 2016 12:51
Does the response of international investors to the UK’s Brexit vote tell us more about the peaking US dollar than prospective European weakness? A key question to pose after the UK Brexit vote was why the US dollar did not rally by more? For Sherlock Holmes fans this looks like another ‘dog that did not bark’. On its trade-weighted index the US unit rose by a mere 1.8% in the initial 3-day period of the ‘shock’. As with the trade-weighted Chinese Yuan, the US dollar remains down by around 5% this year. This latest muted response of the US dollar sits uncomfortably alongside many pundits who continue to push the idea of a super-strong US currency. There may be two reasons behind this: (1) the US dollar is being seen less as the ‘safe haven’ currency – gold jumped by 5% and the trade-weighted Yen by 6.2% (since 2008 the Yen index has a whopping negative 0.81 correlation to risk appetite indexes) and/ or (2) global investors have already invested heavily in dollars over the past few years and need no more.
27. June 2016 16:50
Is this Risk On or Risk Off? First, in financial and economic terms, this is not another 2008. Then the markets stopped working. Today, global markets are shocked, but not frozen. Second, the UK is financially stronger and more robust than it was in 2008. Third, the implications of Brexit are likely greater for the World outside of the UK, than for Britain itself. Should we buy or sell? Longer term equities possibly look a tad better because Brexit will shift policy focus towards more use of fiscal policy and away from the demerits of QE. Greater use of fiscal policies will ultimately worry bond markets. Geopolitics will come to the fore. All-in-all, gold looks increasingly attractive. The liquidity cycles have been telling us that 2016 is the year of gold and commodities. That view continues.
7. June 2016 16:04
In 2007/08 World stock markets were pushed too close to the sun by the spiralling shadow banking markets. In 2011/12 gold and commodities, spurred by soaring Central Bank liquidity, followed. Now, driven by a scramble for ‘safe’ assets, it is the turn of government bond markets. Ironically, their term premia have been driven to such low extremes they now look more like risk assets than ‘safe’ ones. In this topsy-turvy World, investors have been buying bonds for capital gain and equities for yield. Treasuries look vulnerable to both domestic inflation shocks and global capital flow shocks.
25. May 2016 12:12
If a second hike in US policy rates this July now looks a certainty following a strong FOMC hint, the behaviour of the long-end of the bond markets seems more like a conundrum. In a textbook World, rising short-term rates should bearishly flatten the yield curve. Many investors seem so positioned. Up to now we have been big fans of bonds, but it is time to change. We do not disagree that yields should rise, but we suspect that rising yields may come alongside a steepening yield curve. In other words, the long-end of the market could sell-off. And China may hold the key.
18. March 2016 15:13
The US dollar is cracking under pressure from deteriorating fundamentals and maybe a subtle policy co-ordination following the last G20 Shanghai summit. Could this be Plaza2? The asset allocation implications are significant. We focus here on the potential volatility of G4 bond markets. If the links between Chinese capital outflows, surging G4 bonds and a strong US$ are true, then any reversal in flows will cause a further US dollar sell-off and crashing bond prices as investors flee these ‘safe’ assets.
7. March 2016 16:19
Gold is our high conviction trade for 2016. Think of the gold price as the antithesis of paper money. A strong gold price equates to weak paper money: this often means a falling US dollar, but not always. The last couple of years have seen gold reaching record levels measured in EM currencies, but still languishing against the US unit. However, the next 18 months may see an unambiguously strong gold price against all paper units. We expect it to test US$2,000/oz. by mid-2017. The reasons lie in the changing mix of Global Liquidity.
4. March 2016 15:18
Time to buy Gold?
A strong performance from gold bullion so far in 2016 hints that fundamentals may be finally turning against the US dollar. In fact, January saw the largest drop for three years in US private sector cash flow growth, and latest capital flow data appear to show a low in gross activity in late-2015. On top, some rebound in World Central Bank liquidity injections (i.e. QE) later in 2016 still seems likely in our view, given the weakness of wholesale market funding and the plain fact that, over the past year, both China’s PBoC and the US Fed have been unhelpfully tightening liquidity. Gold and (later) commodities are already our conviction investments for 2016. Moreover, flow data for the Aussie and Canadian dollars have coincidently turned positive. If our projections prove correct, expect a US$2,000/oz. gold price by mid-2017.
2. March 2016 13:47
The bear market in global risk assets is gathering pace. It follows in the wake of last year’s lurch downwards in Global Liquidity. Looking ahead, the two key issues are: (1) the collapse in China’s asset bubble, hastened by the PBoC’s tight policy response to the huge capital outflows, and (2) the latest Central Bank error of negative interest rates plus reverse repos. We reiterate our conviction that gold and US Treasuries will be 2016’s best asset choices.