Earlier today, as part of its latest macro markets research roundup, Goldman let a phrase slip, which probably better than anything we have seen in the past few years, captures just how truly broken the "market" is. To wit: "it is important to remember that weak global growth is generally negative for risky assets." That Goldman even had to remind its clients of this dramatic observation, puts to rest any doubts about just how much central banks' central-planning has perverted the cost/benefit analysis of the world.
After the price action of the last 12 months, we often encounter the perception that weak DM growth and low US yields are unambiguously good for EM assets. Of course, as discussed above, there are regimes where lower yields are clearly beneficial for EMs, especially those triggered by significant policy stimulus – notwithstanding stronger growth rates. But, in our view, the macro outcomes that can drive yields firmly lower from here are more consistent with significantly weaker growth outturns, whether from a renewed lurch into contraction in parts of the Euro area, a failure of US growth to maintain the current momentum, or even a further downshift in China growth (which is already tracking weaker than our forecasts).
And in this case it is important to remember that weak global growth is generally negative for risky assets, including in EM. To benchmark asset performance in periods of weak global activity, we analyse asset returns in periods in which the global manufacturing PMI – a proxy for real-time global activity – is falling. Loosely, there have been around ten such episodes since 2000, with varying durations and degrees of intensity – although precise definitions of these periods are somewhat subjective. The average fall was 5.2 PMI points, or 2.7pt outside of the 2001 and 2008 recessions. Despite the heterogeneity, asset returns over this period provide useful guidance on the distribution of risks to EM assets.
Luckily, courtesy of another side effect of central-planning none of this really matters: here is why from Deutsche Bank:
It doesn't seem that good or bad data notably alters the path of assets one way or another at the moment as central bank liquidity continues to trump everything.
Correct, and yet ironic that it has taken the big banks over 5 years to confirm what we first said in early 2009.