GLOBAL: Worsening Outlook Leaves EM Cyclical Stocks Vulnerable
Jun-15 08:46
Executive summary
- Even though selling pressure on LT government bonds remain elevated (i.e. LT bond yields are surging), EM financials have been underperforming the market in recent weeks as global outlook worsens.
- In addition, the fall in China real M1 (in 2021) has been pricing in ‘cheaper’ financials for months.
- Hence, as the global outlook is not about to change anytime soon, the ‘cheap’ EM cyclical sectors may continue to underperform in the near term and defensive allocation should continue to be investors key allocation in the coming months.
Link to full publication:
EM Financials Underperform As Economic Slowdown Accelerates
The significant liquidity injections following the Covid shock combined with the surge in ST and LT bond yields had been a strong driver of EM financial stocks until the Ukraine invasion.
However, we mentioned after the start of the war in the end of February that the momentum on cyclical stocks was clearly unsustainable as the economic outlook was set to worsen considerably. The chart below shows that even though selling pressure on LT government bonds remain elevated (i.e. LT bond yields continue to surge), EM financials have been underperforming the market in recent weeks.
Source: Bloomberg/MNI
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- Further small tightening in the Tnote/Bund spread, this was led by some of the sell off in Europe, after Villeroy's comment on the EUR.
- Bund is fairly illiquid so far today, and the US/Germany 10yr spread test initial support at 193.45, this is the May's low and tightest level since late April.
- Better support is seen at the 26th April low, 190.59.
Chart source: MNI/Bloomberg
STIR FUTURES: Euribor moving lower this morning
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