Credit Risks!

Is It Time To Dump Credits?Skidding Global Liquidity conditions warn of an upcoming credit crisis. Already the danger signs are there, from plunging EM bonds to changes in the term structure of interest rates. We fear US high yield credits could test 500bp over and EM US dollar credits could break through 600bp, over equivalent duration US Treasuries


How Tight Is the US Federal Reserve? Three Charts That Warn About Upcoming RecessionWe have been warning for months that deteriorating Global Liquidity data will negatively impact the World economy by end-2018. Now, latest economic data point to a worrying wobble in US business activity. We have been concerned throughout this year that the US Fed is hitting the brakes harder than widely believed because rate hikes are occurring on top of balance sheet shrinkage. Reliable bond market metrics point to the real risk of an upcoming slowdown, while the recent collapse in investors’ risk appetite warns that an economic inflexion point is close.

Global Capital Flows

The Battle for Middle Earth – The Changing Direction of Global Capital FlowsA major realignment of global capital towards Asia and away from the US looks to us underway, fuelled by future growth opportunities and the prospects of higher profits from Chinese expansion into Central Asia. Set against crashing Global Liquidity, we are concerned that the recent huge build-up of US$ 4 trillion of speculative foreign capital in US financial assets flags an upcoming US dollar sell-off in 2019? America is trying to halt these shifts, as it fights to retain the dollar’s status as the international standard of value.

The liquidity slump and the yield curve

Who Stole Liquidity? The Outlook For US TreasuriesThis report takes a ‘liquidity view’ of the US yield curve and rates. Although Global Liquidity growth is tanking at a worryingly rapid rate, bond market flows look to be more in balance. We do not expect the US Treasury yield curve to invert and it is more likely to gently steepen from around current levels. Yield curve movements depend both on term premia (largely via the long-end) and rate expectations (largely via the front-end). Aggressive rate expectations could drop back, but the low prevailing level of policy rates means it is unlikely they can fall by much. More likely is rising term premia from their unusually depressed levels. Two factors driving term premia higher are: (1) growing supply of US debt and (2) diminishing appetite for US assets from foreigners. According to a ‘liquidity view’, the ‘long-end drives the short-end’ and not vice versa. This will mean two more Fed policy rate increases. US 10-year bonds are likely t…

Does the Yield Curve ever lie?

Recession Watch – Yield Curves Can Predict Future Crises, But You Have To Focus More on Curvature and Term Premia Than SlopeThis report argues that the yield curve slope, by itself, is not a robust predictor of future recessions. Other yield curve parameters need to be taken into account and, specifically, the size and position of the curvature hump in the term structure. In other words, we emphasise curvature and, by implication, the importance of term premia. Not only have term premia recently fallen in size – so indicating greater demand for ‘safe’ assets by investors – but their distribution has become more positively skewed, which has been a better predictor of upcoming recession than the simple yield curve slope. The implication is that the US Fed’s slated future ‘forward guidance’ path may be too aggressive.

Re-Assessing Emerging Markets: What Now?

As Global Liquidity conditions tighten further, we accept that the next few months will prove more challenging for Emerging Markets. Credit is a particular problem and the downside risk is that EM debt spreads could add a further 200bp versus US Treasuries. However, a positive note is that EM domestic fundamentals look far better than during previous crisis periods. In particular, net capital inflows appear surprisingly firm in contrast to recent Press reports. In sum, the EM outlook is poor largely because of external factors, but domestically it does not look a disaster.See our latest published research, Global View Re-Assessing Emerging Markets: What Now?July 2018Please find either a link to our website, or an email attachment.  For further information, or to change user options, please contact us at
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Liquidity is being drained fast...

The Tide Is Going Out…FastHaving previously warned of gathering problems from Q2, the economic and financial news flow is getting worse not better, and we believe asset markets are increasingly vulnerable to a meaningful shake-out. Risk appetite levels remain elevated and yield curves are flattening against a backdrop of fast tightening Global Liquidity. Not only are the two critical channels – Central Bank liquidity and cross-border flows – in retreat, but China, which dominates the pool of World savings, is now halting their recycling back into Western markets.