The macro backdrop story is this:
The 'credit cake', or the credit impulse plus nominal debt issuance, is collapsing. Since the financial crisis, the world's monetary growth (main debt) has risen more than nominal growth, i.e. World Monetary Growth / World Nominal Growth > 1 (8-10%/4-6%)
Now, however, world monetary growth is 2-2.5% against 5-6% world growth, so significantly below 1!
We have, along with Saxo Bank macro head Christopher Dembik, exhaustively documented the collapse in the credit impulse (the change of change in credit), which leads the world by nine-12 months.
The question is, where do we go from here?
The Federal Reserve is insisting on normalising policy rates, meaning that the rest of the world (read: emerging markets) are getting less credit at much higher prices. In the US, meanwhile, this liquidity shortfall has been neutralised by tax reforms that see US firms bringing money back home... and thus increasing liquidity foronshore US markets.
Add to this the most aggressive buy-back, dividend, and M&A period in history (to the tune of around $1.2 billion) and you have the reason why the US market has outperformed, and why it could continue to outperform in the short term.
Is contagion happening? It's too early to tell, but with today’s likely announce of an additional $200 billion in tariffs and the market breakdown shown below, the risk is rising.
The action plan We are still net looking to buy EM risk, but post-today’s announcement. Failure to take out recent EM lows will make us dip our toes; if not, we wait.
The next two trading days will be critical for the overall risk climate, and we will keep you posted as to how we view things playing out.
Now, onto four charts that illustrate the market's present pain:
Tencent Tencent is the most widely owned stock and maintains the biggest weight in global EM funds. The trend been down since March but now it has broken both its recent low plus the low end of the channel.
