Recent turbulence in Emerging Markets has refocused attention on the fragility of the global economy and the limits of monetary stimulus. While boosting risk asset prices, excess liquidity provided by central banks following the financial meltdown has not altered the fundamental imbalances created by insufficient global demand – as indicated by the relative weakness of commodity prices and export dependent Emerging Markets since their initial boost in 2009/10. The ongoing global deflationary environment thus calls into question the sustainability of the sharp rise in bond yields starting at the end of 2012.(See our previous features – Exporting Deflation and Deflation Dynamics).
The conventional wisdom going into 2014 was that continued Fed tapering and improving global economy would again favor US equities over Treasuries. But underlying deflationary forces remain a headwind for equities and tailwind for Treasuries that may reassert themselves this year – favoring the latter. (See our previous features – Speculative Dynamics, Unforeseen Outcomes and Secular Trends).
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