Financial Markets
Corporate profits are more sensitive to selling prices than to volumes. Falling prices even amid mildly rising volumes could produce a meaningful profit contraction. Stay with deflation trades. In particular, maintain the short EM stocks / long U.S. 30-year Treasurys position. Indian stocks are still pricey and will deflate further in absolute terms.
There are no signs of broader financial stress in the Chinese corporate sector. The most recent financial market turmoil has had no systemic damage to corporate sector balance sheets. We are leaning against being overly bearish. Current valuation readings, particularly for Chinese H shares and Hong Kong stocks, on a historical basis have never been sustainable.
The declining correlation between risk assets and Treasury yields suggests that the market perceives monetary policy to be overly restrictive. Historically, this has led the FOMC to adopt a more dovish policy stance.
With inflation expectations declining alongside asset prices in almost every major economy, central banks can at least not make things worse by being more hawkish than necessary.
Equity selloff alone will not catch the Fed's eye unless there is an outright crash.
An oversold bounce may be getting underway, but without a policy assist, it would be a rally to sell. Go to neutral in the growth vs. value trade and beware sub-surface weakness in the consumer discretionary sector.
Taiwan's opposition Democratic Progressive Party is poised to win the presidency and possibly the legislature in elections January 16. The result will be icier cross-strait relations in the coming years that will add a geopolitical headwind to Taiwanese assets, even as it struggles to cope with a low-growth world. Taiwan still has advantages over other emerging markets, but its outlook is darkening.
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