Liquidity risks remain elevated. Our Global Liquidity Index (GLI) for September 2015 is stuck at low levels of 39.0 (‘normal’ range 0-100) or close to the low August reading. Such poor liquidity underscores a ‘Risk Off’ investment environment characterised by high volatility and by the likelihood that economic activity levels will weaken noticeably over the next 6-12 months. We have already warned that low and falling US liquidity levels already point to a modest economic recession by early 2016.

Global Liquidity remains sub-par. End-August 2015 saw our monthly GLI™ (Global Liquidity Index) touch 39.2 (‘normal’ range 0-100). This was a small rise from July and occurred only because that reading was revised down.

China continues to weigh down heavily on EM.The big message we get from our latest data is that China will have to devalue the RMB further. We still predict a 10% drop for 2015.

The Emerging Market component of our Global Risk Index dropped to 69.2 in August, compared to 77.8  in July and the recent peak of 90.4 in January.

Two burning questions are: (a) will a pending US Fed Funds rate hike and (b) continued selling of US dollars and Treasuries by China cause US bond yields to spike higher? Our answer is ‘no’ largely because the safe haven attractions of US Treasuries will keep yields low. A 25 bp rate hike could add 15 bp to 10-year Treasury yields. But another couple of months of capital flight from China could push them down by 50 bp because of lower term premia.

In the upcoming weeks, investors will focus on whether the Fed will hike rates and whether Chinese data will deteriorate further? US monetary tightening is inevitable, but in many ways it has already occurred through the Fed’s ‘silent tightening’ as it enacts further reverse repo operations to curtail liquidity in preparation for a likely September interest rate rise.

In the upcoming weeks, investors will focus on whether the Fed will hike rates and whether Chinese data will deteriorate further? US monetary tightening is inevitable, but in many ways it has already occurred through the Fed’s ‘silent tightening’ as it enacts further reverse repo operations to curtail liquidity in preparation for a likely September interest rate rise.

Could 2016 be a US recession year? Still probably unlikely, but never say never. Latest US liquidity data suggest that the trends still point down. The US Fed is engaging in a ‘silent tightening’ of liquidity ahead of its likely September rate move; net foreign flows are reversing, admittedly more through Americans buying overseas assets, and private sector liquidity is on a downwards trajectory.

China continues to weigh down heavily on EM. The big message we get from our latest data is that China will have to devalue the RMB further. We still predict a 10% drop for 2015. In August 2015, EM Liquidity remained soft testing a sub-par index level of 32.4 (‘normalised’ range 0-100). Chinese Liquidity, which dominates, hit the lower index level of 25.6.

Global Liquidity remains sub-par. End-August 2015 saw our monthly GLI™ (Global Liquidity Index) touch 39.2 (‘normal’ range 0-100). This was a small rise from July and occurred only because that reading was revised down.  Markets are being pulled in two directions: downwards by China and upwards by US liquidity. August’s market volatility may be a teaser for the future: as US liquidity loses its impetus over coming months, so China will weigh more negatively.