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.

Why Are World Investors So Downbeat?

Why Are World Investors So Downbeat?Global investors seem too downbeat in absolute terms, and certainly relative to expanding liquidity conditions and improving economic expectations. They hold moderate levels of equities and high quantities of ‘safe’ assets. Historically, these points usually signal upcoming periods of high equity returns.

Dollar in 2020

The US Dollar in 2020: QE4 Causes A Nasty Sucking Sound?Many indicators are pointing towards ‘risk on’, such as cautious investor positioning data and rising Central Bank liquidity injections. Signs of a US dollar peak would surely confirm this shift, because the US unit has attracted substantial safe-haven flows since 2015? Not only do latest US capital flow data evidence a peak, but, simultaneously, so does the other successful predictor of the US dollar, the quality mix of liquidity. Helped by the Fed’s new QE4 policy, these are peaking after several years of strength. Could 2020 be the year when the US dollar finally stalls?

The QE4 End-Game?

Putting Everything On Red? Why This QE4 Really Matters For All Investors Some policy-makers are downplaying their latest QE4 activities. We think these activities are significant and probably will add around one-fifth to the pool of Central Bank money. During each of the previous QE phases, US bond term premia rose by an average of 135bp, dragging Treasury yields higher. In both QE1 and QE2 the US dollar fell, but in QE3 it strengthened slightly and in all QE phases equity prices rose. We view this renewed QE4 as a ‘risk-on’ period. This phase may signal the ultimate end-game of the 10-year bull market, but, with so much cash already sitting on the side-lines, this new stimulus likely still has some way to go.