Global markets beginning to diverge
China: Manufacturing sentiment slows
United States: FOMC minutes suggest an increasingly hawkish board
United Kingdom: Two MPC members vote for a rate increase
As we wait for Federal Reserve Chairman Janet Yellen’s key Jackson Hole speech later today, markets have moved to price in a multi speed world. Over the last month or so, EM equity indices have ranked among the top performing global markets as their economies have outperformed. In contrast, European equity markets have lagged; even after accounting for the headwind they face due to their outsized exposure to Russian risk. Meanwhile, the US equity market has performed roughly in line on this basis.
Looking across markets globally, over the last month we have seen a coincident move lower in both yields and equities for many European markets (among them Germany, France, Italy, Switzerland, the UK and Spain), while a handful of EM markets – Mexico, India, Russia and Korea – have seen the opposite pattern, with both equities and yields moving higher. We interpret this pattern of co-movement as a repricing higher of growth expectations by EM asset markets (with Korean exports also strengthening, perhaps reflecting the bounce in China and the on-going US acceleration) and a repricing lower of growth expectations by some European markets. One standout was China, which experienced lower yields and higher equities, perhaps as credit conditions ease a bit. Over the last week, equity markets have also stabilised slightly in Europe, while yields continued to decline.
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