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The Sell-Off: Trick or Tweet?

Asset Valuations and Cross-asset Correlations Are All About …. Deflation and Social Media!The latest market panic and fears over recession and growing deflationary pressures encourage us to dig into our research archives. The market may be over-reacting, but it’s clear from history that the biggest threats to financial markets come in deflationary periods. If the coronavirus shock proves sufficiently deflationary, equity valuations could collapse by more. The key takeaway is that modest inflationary periods favour equities, but, providing that inflation remains below around 6%, bond and equities together offer great hedges against unexpected Risk-On and Risk-Off shocks.

The biggest virus?

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The Debt Virus That Threatens The World EconomyThe Coronavirus panic has once again exposed the fragility of the World’s financial system. The problem is too much debt, probably relative to GDP (i.e. solvency risk) and almost certainly relative to liquidity (i.e. re-financing risk). The only remedy is to off-load private sector debt through looser fiscal policies, but the near-term fix requires more liquidity, namely QE.See our latest published research, Global View - The Debt Virus That Threatens The World Economy -  March 2020Please find either a link to our website, or an email attachment.  For further information, or to change user options, please contact us at crossbordercapital@liquidity.com
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China's massive easing

China Shows Its Colours …..Asset markets have largely disconnected from economics and are increasingly spun around by Global Liquidity shocks and swings in Investors’ Risk Appetite. With Risk Appetite still low (this is a much unloved bull market), hit again by fears over the corona virus and Global Liquidity enjoying its biggest boost in decades. We remain upbeat.

Follow the Money

Follow The Money – The Change in Direction of World Capital Flows Favours Emerging Markets in 2020The World is spinning like clockwork. As Central Banks started to ease substantially last year in 2019, so investors’ risk aversion bottomed out, and now, true to form, World capital flows are reshuffling and heading towards riskier climes. It’s a classic liquidity-driven cycle that will inevitably end badly, but for now enjoy the music. History shows that the deteriorating bond and forex markets usually call time on the equity party. So far, things seem OK.

Bond Warning

Action Needed: Rising Yield PressuresThe Global Liquidity backdrop has changed radically. The US Fed has delivered its biggest ever 12-month boost to markets. The strong rally in risk asset prices comes with a warning that liquidity-driven surges often end suddenly. The bogey tends to be rising bond yields. We argue that the US economy looks set to accelerate and US Treasury yields could test 3% later this year.

Liquidity-driven Markets

A Classic Liquidity-Driven MarketThis is a ‘classic’ liquidity-driven market, as 2019 showed. Central Bank quantitative-easing, led by the US, and set against a relatively low exposure to safe assets proved to be the two things that really mattered. Looking into 2020, it may be a year of two distinct halves. Central Banks should continue to ease, at least, for some months more, while, according to our latest data, investors still remain too conservatively positioned in safe assets. Equities, particularly cyclicals, could do well again, and the rally looks set to broaden out beyond the US and other major markets.

Better Understanding China

The Fed Is Easing, But Why Is The PBoC Not… Yet?The World’s major Central Banks are easing again. This is most obvious in the case of the US Federal Reserve and the ECB in Europe, but China’s People’s Bank is not yet expanding its balance sheet. This is holding back the Emerging Markets. We expect China to ultimately ease policy, but we continue to believe that the timing is dependent on the pending China-US trade deal and conditioned by their desire to maintain a stable Yuan.