EM DM Divergence AND More....

1. Powell seems to be committed to solving the inflation scare among the Americans. Inflation was on top of his wish list when applying for the next term as US Fed Chair. The Fed has already started to the pace of money printing and then would presumably start rolling off the maturing bonds of the balance sheet.

2. EM markets have started raising rates amidst higher inflation print every month. This stance creates opportunities for EM debt. This would also strengthen their currency and hence may invite more capital inflow towards their debt and equity markets. While DMs hold back their rates, in the fear that the growth trajectory can be hurt, Ems have a headstart in normalizing the policy.

3. So what happens when the Fed starts to lift off? Do we see the 2013 taper tantrum episode repeating?- I believe that since the EM currencies are stable and well positioned to handle stronger dollars, foreign ownership of EM assets isn't that large and rates have followed an organic trajectory, EMs aren't exposed to Fed tightening as much this time.

4. Supply chain disruptions have worsened around the world, pushing up inflation sharply and likely weighing on growth ahead. More than half of euro area manufacturing firms say equipment shortages are a material constraint on production, as the yellow line in the chart shows. In contrast to the U.S., labor shortages are less of an issue, though still affecting over a fifth. This is partly driven by different labor approaches during the pandemic, with the U.S. opting for lay-offs and the euro area for furlough schemes.

5. The emergence of the new variant of the virus and winter kicking in larger areas of the northern hemisphere, supply chains can again be rattled to thwart the best recovery story we have seen so far. Renewed lockdowns and restrictions can impede the cyclical growth trade and in turn cause deeper tensions when amongst the supply chain sensitive sectors.

6. Equity market participation is at all-time highs, with households now owning roughly 40% of the U.S. Equity market. While equity ownership has been climbing for years, the unique circumstances created by the pandemic in the form of excess savings and cash along with spending more time indoors seem to have abetted individual investors’ engagement in the financial markets.

7. The retail participation also affects the recovery trajectory and sectoral distribution of the pullback. Retail investors were one of the biggest buyers in the recovery back in April 2020 and May 2021. Furthermore, the price reaction to positive earnings news is also pronounced with the retail traders.

8. An interesting change over the past couple of recent months is the reversal in the non residential capex and share buybacks by US companies. This indicates a reversal in the upward trend which triggered from the collapse in March 2020. This further shows that companies are positive about future outlook and are holding cash to reinvest in ambitious projects

9. Crude, even after the recent spike in virus cases, hasn’t come down as much, in part because of the OPEC supply cuts. But any other series of lockdowns could push it to sub 60 levels and that is a win win for major importers, like India.

10. The Chinese renminbi is one of its best years. This is primarily due to outperforming the economy and earnings. Trade-weighted Renminbi Index against 24 currencies is up 8.2% year-to date to its highest level since December 2015.

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