Re-Assessing Emerging Markets: What Now?

by Michael J. Howell4. July 2018 16:37

As Global Liquidity conditions tighten further, we accept that the next few months will prove more challenging for Emerging Markets. Credit is a particular problem and the downside risk is that EM debt spreads could add a further 200bp versus US Treasuries. However, a positive note is that EM domestic fundamentals look far better than during previous crisis periods. In particular, net capital inflows appear surprisingly firm in contrast to recent Press reports. In sum, the EM outlook is poor largely because of external factors, but domestically it does not look a disaster.


Red Alert for Markets? PBoC Watching Signals Danger Ahead

by Michael J. Howell22. June 2018 16:20

Never say never in financial markets. On paper, China’s PBoC has few reasons to tighten in 2018, but latest data show the People’s Bank squeezing moderately. This may be a temporary blip, but the huge size and influence of the PBoC makes it a critical factor to watch.


Why Asia Really Is Different This Time

by Michael J. Howell30. May 2018 17:25

There is an ever more distinct Asian financial cycle. Structural economic changes are altering the shape of the World economy, largely, in recognition of China’s increasingly dominant role. Policy-makers are responding. We do not mean by this the latest reactive moves by US President Trump, rather the longer-term strategic adjustments being implemented by Asian regional policy-makers. Foremost are the implied shift by Japan towards Yen-targeting and the suggestion that China has stopped building forex reserves. If we are correct, these moves prospectively represent the biggest policy changes in Asia for three-decades.


Emerging Market Crises – When to Push the Panic Button?

by Michael J. Howell29. May 2018 16:19

We continue to be more concerned by developments in the core economies than in EMs, but we also acknowledge that when the liquidity tide goes out, then EMs can look vulnerable. In this report, we argue three things: (1) every EM crisis is first-and-foremost a currency crisis; (2) EM fundamentals appear far stronger than in past EM currency crises, and (3) the Chinese economy is now more important than the US economy to the fortunes of EMs. Although we remain negative about global markets, we are more upbeat about medium-term EM prospects and conclude that the latest shake-out is nothing like 1997, 2001 nor 2008. Therefore, buying into EM weakness makes sense.


What Capital Flows Tell Us About A Coming 2018 Correction?

by Michael J. Howell22. May 2018 10:39

Quantitative analysis shows that three liquidity-based factors, above all, often combine to warn of an approaching bear market (6-12 months ahead) in global risk assets. Today, all three are signalling caution: one measures the skew in exposure – investors’ risk appetite – and the other two a peak in the flow of liquidity into markets – Central Bank liquidity injections and cross-border capital flows. A correction is not certain, but the track record of these factors is sufficiently good for us to pay attention.


The Big(ger) Question for the Rest of 2018

by Michael J. Howell13. April 2018 12:22

It is not trade tensions and not the Fed that ultimately matter for investors over the rest of 2018, but China and, specifically, the actions of the PBoC (People’s Bank). In short, what we really need to know is whether the PBoC will be easing or tightening this year. Latest data, now largely undistorted by the recent Lunar New Year, suggests that there is a moderate temporary tightening bias. Chinese monetary tightening proved a wrecking ball for investors in 2008 and again in 2015, but monetary easing from early 2016 boosted World Markets. We figure PBoC policy will return to a moderately loose stance through the rest of 2018. This matters.


Why A Trade War Will Not Save The Trump Dollar

by Michael J. Howell28. March 2018 12:39

In recent days, we have been inundated with concerns about a coming tariff war and rising tensions between America and China. A major trade war is unlikely for many reasons and not least because of the growing importance of international supply chains. Moreover, capital flows matter more than trade flows, and here the big picture is dominated by the role of the US dollar. Unambiguously, China is trying to topple the USD. She has a long-term strategy we dub the Beijing Consensus, and a crucial step is occurring this week with trading of the petro-yuan contract starting on the Shanghai futures exchange. Watch this space!


The Asian Financial Cycle (Part II) … After The Latest Round Of Rate Rises, Could The World Economy Slow?

by Michael J. Howell23. March 2018 16:35

With investor sentiment elevated and markets looking skittish, many fear that these jitters could be a precursor to future economic weakness, particularly if China tightens policy in 2018. Indeed, some have suggested this squeeze is already underway. China plainly matters a lot, but we do not see the PBoC tightening this year. Rather we expect policy to remain accommodative.  This will underpin a rising Asian Liquidity Cycle. Liquidity drives economies: this report argues that investors are still ignoring the huge scope that Asian and EM economies have to ‘catch up’ with the West. Any broad sell-off should be welcomed as an opportunity to buy back into these markets at lower levels.


Using AI and Machine Learning to Predict Future Financial Crises

by Michael J. Howell15. March 2018 10:32

At CBC, we use machine-learning techniques to uncover three intuitive liquidity-based drivers of future financial crises – (1) cross-border capital flows; (2) investors’ risk appetite and (3) Central Bank policy. Adding these factors to a probit model warns of upcoming problems in 2018, largely because of reversing cross-border flows out of the US dollar. Reverse QE by Central Banks is unhelpful in this context, but it is unlikely by itself to trigger a crisis. Liquidity is important, but cross-border flows are the paramount factor to watch.


So Did Chinese Tightening Really Cause the 2008 Global Financial Crisis?

by Michael J. Howell21. February 2018 11:49

Most analysts would agree that US shadow banking, and its associated leverage and inadequate regulation, lay at the heart of the World’s financial problems in 2008 and that distress in the sub-prime mortgage market ultimately triggered the Crash. But we suggest here that there may be another explanation that closely involves China? This is not in any way to suggest that China caused the GFC. Rather it says that we always need to take a broad, global view and to understand the effects of cross-border capital flows on markets.


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