A Rare Warning From Goldman: “Global Risk Appetite Is Becoming Increasingly Fragile”
by Tyler Durden
ZeroHedge.com
Mon, 09/17/2018
As Goldman’s Charles Himmelberg writes in a Sunday note, it has been a “summer to forget for EMs” – while the reason has been wild swings in EM stocks and currencies, both of which have seen sharp drops in recent months with the JP Morgan EM FX and MSCI EM equity indices registering declines of roughly 14% and 7%, the driving factor has been underperformance in EM growth relative to the US.
As Goldman notes, US growth has managed to meet or beat the high growth expectations coming into the year, while “EM growth has disappointed”. This is shown in the chart below which illustrates this contrast using Goldman’s current activity indicators (CAIs) which remains elevated for the US but the EM CAI has fallen meaningfully this year. This is in contrast with 2017, during which both US and EM growth were steadily improving.
What is more interesting is what Goldman shows on the right panel of the chart above, which provides a more granular picture of EM vs US economies, using the bank’s proprietary MAP index of economic surprises and suggests there’s more to the story than just growth. In particular, EM data were “out-surprising” the US for most of Feb, March and April, but EM equities (in USD) were flat relative to US equities. This, Goldman claims, has to do with the fact that US real rates were diverging from the rest of the world, gradually “boiling the frog” on global risk assets.
The chart below illustrates the real rate divergence for DM and EM, plotting the median and the 10-90 percentile range of 3-month real rates across countries, against which the US (real) rate is overlaid (we also extend these series through 2019 using GS forecasts).
The Rest…HERE
