China is on our negative watch list compared with the rest of the global equity universe. Countries which have occupied its current chart position normally drop into the bottom quartile. Part of the problem is the faltering performance of the local Tech sector, the largest in the index. A decline in Chinese equities would quickly complicate relationships with the new US administration and make global investors very nervous.

We stay with our early-year focus on volatility. Many commentators have focussed on the potential for political shocks, but we may be on the verge of an ultra-low volatility regime similar to the Goldilocks period of 2006 and 2007, consistent with abundant liquidity, accelerating growth and fiscal stimulus in many developed economies.

Many analysts cite a possible break in the regime of low volatility as a potential threat to the performance US Equities. They are right, but they only have half the story. A rise in equity volatility only matters if it is NOT accompanied by a rise in Treasury volatility. If it is, there is no change to the hurdle rate which determines the risk-efficiency of equities relative to bonds.

Our charts suggest that US Treasuries are oversold and that equity sectors like US Financials are overbought. Even if forecasts of the new Trumpflation era are correct, investors still need to price the risk of non-delivery. Where better than in those assets which reacted strongest when the new era dawned?

Nothing illustrates the cumulative distortions QE has imposed on US financial markets, better than the historic returns of a balanced 50/50 portfolio relative to cash. The current upswing has lasted almost eight years in an unbroken trend, as opposed the usual five. Our probability indicators suggest that we are getting close to a break of trend. If the Fed raises rates by more than expected in 2017, cash may yet be king.

US cash deposits are a neglected asset class. Our models suggest that US Treasuries, Gold and Investment Grade bonds have a low or no-better-than-evens chance of beating cash on a risk-adjusted basis. If you don’t have to own them, you should be reducing your exposure. Our numbers do not include the risk the Fed decides to surprise on the upside in 2017.

We all wonder what happens if the Italian government loses the constitutional referendum on December 4^th. Most investors understand the negative implications for France, but our analysis suggests that Belgium would also suffer badly. Germany is our preferred safe-haven, but our second choice is Spain.

Last week we focussed on the prospects for CNY USD exchange rate in the wake of Mr Trump’s election. This week we add falling EM equities, unstable asset allocation models and rising political risk in the Eurozone to the list of issues which confront international investors.  We also note that Japan is hardly affected by any of them.

Now that the US elections are over, markets will begin to refocus on the big issues facing the global economy, one of which is the CNY USD exchange rate. We think that the behaviour of the Chinese Industrials sector may offer valuable insight into what Chinese investors think about this.