As Political and Economic Uncertainty Rattle Developed Markets - Emerging Markets Provide a Haven

Global Macro Strategy

Callum Henderson

Thematic (Sector/Industry)

* Peak liquidity, geopolitics, positioning and policy are top-down headwinds for EM, supporting the USD near-term* As liquidity has peaked, so less of it heads to EM and narrowing rate spreads, plus increasing uncertainty over the economic cycle make the choice of EM country allocation more important* With increasing cyclical uncertainty comes greater asset sensitivity to political and geopolitical risk* The trading market remains short USD, notably against DM but also many EM currencies* US macroeconomic policies are driving the USD higher near-term, although longer-term fundamentals (and tweets) argue for a multi-year USD bear cycle* Asian currencies will likely correct further, particularly if evidence grows of a mild China slowdown from Q2

* Peak liquidity, geopolitics, positioning and policy are top-down headwinds for EM, supporting the USD near-term* As liquidity has peaked, so less of it heads to EM and narrowing rate spreads, plus increasing uncertainty over the economic cycle make the choice of EM country allocation more important* With increasing cyclical uncertainty comes greater asset sensitivity to political and geopolitical risk* The trading market remains short USD, notably against DM but also many EM currencies* US macroeconomic policies are driving the USD higher near-term, although longer-term fundamentals (and tweets) argue for a multi-year USD bear cycle* Asian currencies will likely correct further, particularly if evidence grows of a mild China slowdown from Q2

Asia Calling: Dollar Rally Set to Continue on Real Yields, Positioning, Policy