Watch out for the rise!
Sorry if you thought we mean stockmarkets rising. We don’t. We mean liquidity. Here end-June data from our friends at CrossBorder Capital is showing a significant jump, much in line with our predictions over the last few months. It’s happening where investors aren’t looking – in Asia and the private sector. In Asia, the PBoC has clearly taken its feet off the brakes again, perhaps in consequence of the slowing economy as per yesterday's headline. There’s a sub-theme we’ve mentioned before here too – the Bank of Japan seems to be easing in line with China, bearing out our view that Japan has for several years now targeted currency stability first and foremost rather than foreign currency.
The real theme of the latest data is the surge in private sector liquidity around the world but particularly the US. This is not all good news, as it may be corporates building up cash before an economic downturn. But it does increase the likelihood of steeper yield curves. In theory that fits neatly with our general view predicting a bullish steepening with short term yields falling alongside US rate cuts.
However, the facts don’t all fit. Historically, this late-cycle environment is associated with rising term premia, suggesting that longer term bond yields may in fact rise, and a bearish steepening. At the same time, one of the worries we have had over the past few months, the fragility of corporate bond markets, seems to have eased off a bit, so the bulls expecting the US to cut rates may be premature. So, while we expect the curve to steepen as liquidity supply increases, we are less confident which end of the curve will move.
QE4 is starting but it seems that the US Fed may be the laggard rather than the leader this time round. It suggests that Emerging Markets will, at some point quite soon, have a run of some sort but once again not all the facts fit. CrossBorder flows of capital are running clearly away from emerging markets, and particularly the larger ones such as China, into safer havens mainly in Developed Markets. Liquidity may well be on the rise, and highly valued US equities may be underpinned by that, but we’re not sure that adds up necessarily to further gains in global indices.
If you’d like to see the underlying data, please contact the team.