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.

Financials are rallying fast, driven by a significant decline in volatility in the US and the UK, which is exactly what our models expect. We don’t know whether this is justified by fundamentals, but we do know that every investor with an underweight position will have to consider reducing the risk relative to benchmark, sooner or later.

Buying Eurozone equities on the basis of currency weakness is a tried and trusted tactic, which is suddenly in vogue as the euro approaches a 13-year low against the dollar. Enjoy it while it lasts, because US equities will struggle if dollar strength prompts a wave of downgrades for 2017 earnings.

Our US equity model has suddenly started dumping defensives and buying cyclicals and Financials. It looks as though US investors are rolling the dice again. Their only hope of outperforming in a dull year is to generate some alpha in their US equity portfolio, but it’s a low conviction trade.

Most of the main asset markets are range bound and moving sideways. So this week we focus on equity sectors where there has been a recent turning point in the risk/reward ratio. We also include a few sectors where the trend has clearly not changed even though some investors might wish it had.

When Eurozone investors are a lot more bullish about global equities than their US counterparts, we start to get nervous. There are structural reasons for this behaviour, but it can be a sign that a correction in equity markets is on the way.

This is the second part of our exercise looking at ways in which investors can diversify away from the threat of falling US Treasuries. This week we focus on global equities and argue that the best protection is offered by Greater China (including Taiwan and Hong Kong). This region is also on the positive watch-list in our All-World Country Equity Report.

We think that the best way dealing with falling Treasuries is to stay in fixed income and to seek out situations in the credit markets, which are priced for high levels of risk, and where volatility is still falling. The problem with reducing duration or buying inflation-linked bonds is that the Fed and other central banks can force you to unwind it if they want to.

Most of the major developed equity markets, except the US, are positively correlated with their local government bond market. This makes portfolio diversification very difficult, but the basic conclusion is that if you think government bonds are going to fall, you should expect equities to fall further.