Emerging Markets

There has been an unprecedented divergence between global and Chinese thermal coal ("coal") prices since the Russia-Ukraine war commenced in February 2022. Such a wide price gap is unsustainable. This price convergence will continue, with international prices falling faster than Chinese ones.

Favor US and Southeast Asian stocks over global stocks. Stay underweight China, Hong Kong, and Taiwan.

A country’s external balance remains one of the key pillars of the longer-term trend for the exchange rate. In this week’s report, we look at the developments in global basic balances, and their implications for currency strategy.

The G7’s attempt to insert itself in the oil-price-formation process performed by global trading markets will distort markets and the signals driving production, consumption and investment. The G7 will need a face-saving off-ramp to ditch this planner-based proposal. We expect Brent prices to move toward our expectations of $105/bbl in 4Q22 and $118/bbl in 2023, and remain long the XOP ETF.

BCA’s Emerging Markets Strategy team’s view remains that US inflation will prove to be sticky. That said, in this report, we examine under what conditions a considerable drop in US core inflation, whenever it transpires, would be bullish for stocks. Potentially significant US disinflation would be bullish for stocks if it is due to an improvement in supply-side dynamics, but bearish if it is demand driven.

OPEC 2.0’s decision to cut 2mm b/d of output beginning in December telescopes the loss of Russian volumes we expect over the course of the coming year. OPEC 2.0 clearly is not playing by the G7’s or the US’s rules. This will keep prices volatile.