The Global Liquidity Index (GLIÔ) rebounded in April 2015 to 40.3 from 37.1 in March ('normal' range 0-100).

The Emerging Market component of our Global Risk Index fell to 68.1 in April, compared to 73.8  in March and the recent peak of 90.6 in January.

This is the most important question currently facing investors: it is even more important than the question whether China is truly easing or not? Bagehot was a nineteenth century economist, author of Lombard Street and the architect of the key Central Banking doctrine of Lender of the Last Resort. China’s problem is highlighted in the chart below. Shadow bank lending is cratering and many domestic banks look troubled. Shadow banks supply roughly one-third of total Chinese credit. Chinese credit itself totals nearly US$25 trillion or close to a quarter of total Global Liquidity. China is plainly important economically, but she could be more important financially. Put another way, could there be a Chinese equivalent of the Lehman Bros. failure in coming months? China’s People’s Bank (PBoC) plainly has muscle: its balance sheet is now one-fifth larger in nominal terms than the US Federal Reserve’s. But will it use its power to bail-out troubled institutions?

The World is split between those markets where liquidity is rising – Eurozone, China, EM and Japan – and those markets where liquidity is falling or low – US and UK. Prospects for the former group are positive, but less favourable for the latter group where our asset allocation is consequently defensive.

Bonds may be richly priced based on their risk (or term) premia, but we can find no evidence of a G4 bond bubble despite obvious investor concerns raised by negative interest rates for many issues. This does not say that bond prices will not fall, nor yields rise over coming months. Indeed, we are expressly negative on the US Treasury and Bund markets for liquidity-based reasons. However, there is no bubble in the normal sense. The only major anomaly we can spot based on G4 risk premia is the remarkable lack of disparity, despite obvious monetary policy differences.

April 2015 has proved to be a strong month for Emerging Market Liquidity with the EM component of our GLITM (Global Liquidity Index) hitting 41.0 (‘normal’ range 0-100) from 32.4 at end-March. Although the index is still below the neutral threshold of 50, the EM Liquidity trend is plainly up and reinforced further by the early May announcement of more Chinese easing.

New Report Published: The strong dollar now leads the field of excuses for the (un)surprisingly weak economy in 2015. US policy makers are naming and shaming their currency to such an extent that it questions whether the greenback could soon join the on-going global currency war. If so, who wins? Gold is looking the favourite since it is especially sensitive to Central Bank actions.

Emerging Markets have been a value trap for several years, but 2015 is seeing a change. In our view, they are now worth considering for new investment for three important reasons. Foremost among these is the prospect of Chinese monetary easing. Chineseliquidity, and not US liquidity, is the key driving factor for the sector and this is set to increase significantly.

 This report argues that US bonds are vulnerable to a sell-off, but strangely this threat emanates from Beijing not Washington. The critical role of bond term premia, following the exhaustion of secular downtrends in real interest rates and inflation expectations, makes liquidity a key factor to watch. Liquidity drives bond term premia pro-cyclically, but, with China’s PBoC now one-fifth bigger than the Fed, the fact that the Chinese Central Bank is now easing and the US Fed is still pondering a rate hike matters. Honey, who stole our interest rates…?