The bear market in global risk assets is gathering pace. It follows in the wake of last year’s lurch downwards in Global Liquidity. Looking ahead, the two key issues are: (1) the collapse in China’s asset bubble, hastened by the PBoC’s tight policy response to the huge capital outflows, and (2) the latest Central Bank error of negative interest rates plus reverse repos. We reiterate our conviction that gold and US Treasuries will be 2016’s best asset choices.

The investment outlook remains challenging, with EM equities and forex markets likely to suffer heightened volatility. The low level of the broader GLI™ is consistent with future World economic weakness but it remains above the critical 30-level which has traditionally signalled World economic recession.

The Emerging Market component of our Global Risk Index fell to 74.5 in January 2016, its lowest level in two years and significantly below the recent peak of 91.4 a year ago. Not surprisingly, given recent events in markets, the single biggest contributor to lower overall risk was Exposure Risk which has plunged to 23.7.

Weak liquidity points to volatile asset markets and future economic weakness. The US dollar bull market is likely to peak later in 2016. Gold looks an increasingly interesting alternative.

Could this be the week when the World’s two most celebrated General Theories were proved correct? Keynes’ General Theory of Money and Einstein’s General Theory of Relativity. Both spell out the dangers of black holes. But whereas the risk of Earth disappearing into a cosmic black hole may be hypothetical, the liquidity black hole in global credit markets is here-and-now. Watch-out, we are being sucked in!

The Positives in Japan's Negative Rate Decision

Japan’s surprise shift to negative policy rates looks a carefully scripted attempt to deliberately weaken the Yen, possibly because policy-makers fear a much lower Chinese Yuan. Since this further delays what we see as an inevitable (Yen positive) fiscal policy easing, we now expect more near-term Yen weakness. Looking more broadly, the BoJ move signals that negative rates have become an acceptable policy-option and one that the US Fed could also embrace. A higher gold price may be the obvious winner from this general breaking of the zero lower bound (ZLB).

 More Global Liquidity Troubles

The GLI™ (Global Liquidity Index) fell heavily again in January 2016 to 35.1 (‘normalised’ range 0-100) from 42.2 at end-2015. Liquidity is a leading indicator, predating the real economy by 12-15 months and financial markets by 6-9 months.

 Emerging Market Liquidity may be bottoming? 

The EMLI™ (Emerging Market Liquidity Index) sub-component of our GLI™ rose in January 2016 to 27.0 (‘normalised’ range 0-100) from 23.8 at end-2015. This EMLI™ rise contrasts with the slump in the overall GLI™ to 35.1, highlighting the worsening picture for the Developed Markets.

The Emerging Market Liquidity Index (EMLI™), our forward-looking indicator of investment risk and future economic prospects, ended the year at a low 30.2, or barely changed on the month and only a tad higher compared to end-2014. The GLI™ (Global Liquidity Index) and the EMLI™ both warn of continued tough investment markets and slower economic activity ahead.

Global Liquidity, our forward-looking indicator of investment risk and future economic prospects, slid lower at the end of 2015, closing the year at an index value of 41.8 (‘normal’ range 0-100). This compares to 50.2 for end-2014. The GLI™ (Global Liquidity Index) essentially trended lower consistently through 2015 and its low level warns of continued tough investment markets and slower economic activity ahead.