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…?

World investors have two masters: America and China. Emerging Markets are caught between the two. Four years of strong US Liquidity have underpinned the more US-linked markets, like Mexico, Israel and the Philippines, but previously tight Chinese Liquidity has hit many others, such as China directly and Brazil. India may uniquely stand apart. Our data show that these extremes may be changing places. US Liquidity is sliding (underscored by the threat of a mid-year Fed tightening): China’s PBoC is definitively easing, with the only doubt about the speed of both. Who will be the more aggressive? Our money is on China, since the Fed is likely unable to tighten much anyway given the nervous state of the economy. Note that the PBoC is now the World’s largest Central Bank (one-fifth bigger than the US Fed) and its liquidity has a major impact both domestically and regionally.

Eurozone liquidity is strong and latest April weekly data signals point to renewed Bank of Japan easing, but what really matters for markets is the balance between Chinese and US liquidity: these two economies control more than half of Global Liquidity. Since 2012, China and America's liquidity pumps have been operating at very different speeds, with the US strong and China weak. Now, just as the US Fed is debating tightening policy, China's PBoC has begun to ease. China is more important to the World economy (and Emerging Markets) than the Eurozone and Japan.

Emerging Market Liquidity rose again in March 2015, reinforcing an uptrend in flows that started around the second half of 2014. The EM Liquidity Cycle looks to be in a Rebound phase. Thus, the EM component of our GLI™ (Global Liquidity Index) touched 29.9 at end-March (‘normal’ range 0-100) from 19.0 at end-February 2015. Although the trend is up, the previous two months encountered some unusually sharp downward index revisions following the re-statement of Asian Liquidity data for January, largely we suspect because of timing issues ahead of the Chinese New Year. The new data suggest a less aggressive recent trend in PBoC easing. Even so, we still see a strong upward direction, fuelled by the current severe Chinese economic weakness. Chinese investors appear to agree that more money is being pumped in.

Biggest jump in BoJ QQE since December. See latest Weekly Global Liquidity Update report for more info.

The Global Liquidity Index (GLI™) increased in absolute terms to 36.7 from 29.7 in February ('normal' range 0-100).

There were some unusual and hefty downward revisions to past data, largely across Emerging Asia, and notably for January 2015, where it appears that the timing of the Chinese New Year distorted the original estimates.Overall, World liquidity conditions remain sub-par, with the index at or below average now for seven months and so providing underlying support to bond prices. Moreover, Developed Markets’ Liquidity (45.9) is sliding from high levels and liquidity in Emerging Markets (26.2) is rebounding from low levels. The picture is consistent with a slowing, but not recessionary, World economy, with now better chances of some business upturn six months ahead. Judging from liquidity, the best we can hope for is a continuing ‘risk-on’ investment environment in the Eurozone and Emerging Markets, and no shift to ‘risk-off’ in the US.