Global equity and commodity prices have cheered the Fed’s dovish forecasts published last week. Meanwhile, the stability of the yuan is another source of glee for EM and commodity markets. However, we continue to expect the Fed-induced rally to be short-lived.
After a disappointing reaction to the ECB’s policy easing on March 10, global equity and commodity prices have cheered the Fed’s dovish set of forecasts published last week. Also, the recent period of stability in the yuan is defying many market participants’ dire expectations. True, the previous dose of fiscal stimulus undertaken by the Chinese authorities could spell a temporary period of strength in the Chinese economy, which would help the EM and commodity complex for a few months. But the burden of proof remains high for this second scenario.
Read: Markets Facing "Global Overhang of Draining Liquidity," Says Expert
While a China-induced risk rally could last a few months longer than a strictly Fed-induced one, and hence be more playable for nimble investors, the Chinese economy remains plagued by a massive debt load, excess capacity, and deep deflationary forces, none of which are being fundamentally addressed. This suggests that any improvement will be temporary. Moreover, the longer the rally in commodities lasts, the more aggressive the Fed will get, creating another set of problems for commodities.
There are good odds EM assets will make new lows later this year; DM equities will also continue to face a challenging backdrop this year.
