Top 5 Charts of the Week: Emerging Markets, China, Gold, and Policy Rates

1. OECD Leading Indicators — EM vs DM: With EM equities under pressure following the trade war escalation, here’s a refreshing piece of good news. The latest OECD composite leading indicators (just released) show the aggregated (GDP-weighted) indicator for Emerging Markets clearly in recovery mode, having bottomed in November last year.
The same can not be said however for Developed Markets, as the aggregated indicator for DM deteriorated further. Anyone for “de-coupling”?

2. Economic Noise Index — Emerging Markets: Those who follow my work know I am fond of designing the occasional weird and wacky indicator, and here’s a good example. I call it the “Economic Noise Index”, and basically it combines the signal from the economic policy uncertainty index and the economic surprise index.
The lower the indicator, the worse the economic noise is, and the higher the indicator, the better the economic noise is. For EM, this indicator bottomed in December last year, and the economic noise out of EM has slowly started to sound a little better.

3. Chinese Yuan Devaluation = Path of Least Resistance: I can’t not talk about the Renminbi, and indeed I covered it in my Monday markets monitor. Below is one of the charts I pointed to, which shows the RRR inverted against the USDCNY. The punchline is that policy easing tends to put the CNY on a weakening path. Of course the thing that really got the USDCNY on the move is obviously the trade-deal break-down.
Looking only at exporters’ P&L, it probably makes sense for China to allow the CNY to weaken, as this would offset the impact of tariffs. In practice, it’s a little more complicated than that given many large corporates have US dollar borrowings, so that puts a constraint on excessive weakening (as does capital flight issues – though the doors are shut fairly tight on that right now anyway). But overall if I had to guess, I’d say a test of the 7.0 level is probably on the cards, and that would cause issues for Asian/EMFX (to say the least).

4. Gold: Breakout Time? The trade war escalation is not all bad, just ask the gold bugs. Gold has broken out against it’s very short term down trend line, but is currently contending with the 1300 level. Actually, if anything, gold bugs might be disappointed by the relatively meek move by gold all things considered.
It reminds me of what I wrote a few weeks ago when I reviewed the medium term outlook for gold, and in the end I concluded the situation was a case of “bearish until proven bullish“. Benign skepticism for now.
That said, look at how gold volatility is starting to stir: compressions in volatility can be a good lead-indicator of a future large move, so that’s something to keep in mind as the battle between bulls and bears plays out here.

5. Global Monetary Policy Outlook: Last chart is one of my favorites, and catches some really key themes/trends. First thing to note is how for a 9-month streak in 2018, there were exclusively rate hikes. Add to that BOJ/ECB tapering and Fed QT and it stacks up as being a year of intensive monetary policy tightening – the most significant post-crisis. It’s perhaps obvious then in hindsight that growth should have slowed, certainly that there should have been some market indigestion. As for now, it seems the tides are turning…
So it raises a couple of questions which I will leave open for you to ponder: a. Was the 2018 tightening a policy mistake? (too much, too fast); b. Should central banks be preemptively easing right now given the risk of deflation overshoot? c. How much easing will come, and how fast?