CoreMacro

Special Report

Commentators often use notions like debt deflation, balance sheet recession, and liquidity trap interchangeably. Yet, these are different concepts. This report develops a framework and provides a diagnosis of China’s economic malaise. A follow-up report will deal with what kind of treatment is needed for a recovery. As a trade, we recommend shorting the EM equity index.

Numerous divergences have opened up between global risk assets and global business cycle variables. These gaps are unsustainable, and odds are that the recoupling will occur to the downside with risk assets selling off.

In absolute terms, Mexican markets may correct given their impressive rally and an impending EM risk-off move. Relative to EM however, Mexico will continue to outperform given its unique cyclical and structural macro fundamentals, as well as attractive valuations.

Special Report

Some investors have thrown in the towel on investing in Chinese equities, instead deploying capital in EM ex-China – or at least contemplating doing so. This report examines the merits of investing in EM ex-China stocks and concludes that EM – whether including or excluding China - will continue underperforming DM equities.

Foreign debt inflows into Philippines will be falling in coming months. Book profits on domestic bonds; and go short the peso.

Stay cautious on Chinese stocks. Equity investors should use any rebound in onshore stock prices to downgrade A-shares from overweight to neutral within global and EM equity portfolios. Remain underweight Chinese investable/offshore stocks. Onshore bond yields will drop to all-time lows. Continue receiving 10-year swap rates. The currency will continue depreciating versus the US dollar in the coming months.

In this report, we dissect which markets have broken out and which ones have not, and reflect what this entails for our global macro view. Also, we analyze how the S&P 500 has been taking its cues from a change in the inflation trend. Yet, inflation dynamics are complex, and a falling inflation rate does not mean that the inflation menace has been eliminated.

In this report, we explore Brazil’s inflation and monetary policy outlook, the Lula administration’s back-and-forth between pragmatism and populism, and how these factors will affect Brazilian financial markets going forward. All in all, we believe Brazilian risk assets will be in a trading range relative to their EM peers in the next 12 months.

With easing inflation, Singapore’s domestic liquidity is set to improve meaningfully. Put this bourse on an upgrade watch list. A new trade: go overweight Singapore domestic bonds relative to EM.

On one hand, China will be exporting deflation to the rest of the world. On the other hand, core inflation is sticky in the US, making the Fed err on the hawkish side. Altogether, these crosscurrents are creating a toxic mix for risk asset prices.