Emerging Markets, the Renminbi & Eurozone Banks
Our recommended underweights for Eurozone Financials and EM Equities are at the sort of levels we saw just before major crises such as 2008 and 2010-12. We think that both can be traced back to tightening financial conditions and restricted dollar liquidity. What concerns us is that neither the Fed and the ECB are prepared to admit there may be a problem or that these two themes could feed off each other. We also worry that further devaluation of the Chinese renminbi could put additional pressure on EM Equities and bring a potential flashpoint closer.