CoreMacro

The downside risks to the RMB are mainly an overshoot of the dollar as the Fed raises rates. The PBoC will allow the RMB to fall against the dollar if the dollar strengthens broadly, but a freefall is not in the cards. The RMB is unlikely to fall more than 5% against the dollar in the next 12 months, unless the latter appreciates by over 10% in trade-weighted terms.

We reveal what our most-trusted leading indicators are predicting about the major economies, and end with a provocative conclusion.

Special Report

In China and the majority EMs, credit impulses will be negative over the next 12 months as and if their credit growth converges towards their current nominal GDP growth. These negative credit impulses will dampen EM/China growth and their corporate profits. In the next 12 months, the credit cycle is most vulnerable in China, Brazil, Turkey, and Malaysia and least vulnerable in central Europe, the Philippines, and Mexico.

Chair Janet Yellen's comments at Jackson Hole reinforce our view that a Fed rate hike is highly unlikely until December. The risk is that overbought equity and junk bond markets correct as an oversold dollar prices in a December move.

In August, the model outperformed the S&P 500 and global equities in both USD and local-currency terms. For September, the model increased its allocation to cash and trimmed its exposure to equities.

The post-Brexit rebound has pushed stocks into overbought territory. U.S. equities, in particular, look increasingly priced for perfection. Higher U.S. rate expectations will push up the dollar, further curbing S&P 500 profit growth. Share buyback activity and dividend growth are slowing, while U.S. election risks are likely to rise. Go short the NASDAQ 100 futures as a tactical hedge.

Special Report

Mental Accounting Bias creates an irrational attraction to yield, while The Halo Effect incentivizes companies to generate yield. Neither phenomenon is sustainable. We identify three sectors to avoid, and two to own.

Our primary argument for continued EM/China growth disappointments is that their credit growth is set to decelerate further and credit impulses will remain negative, depressing economic growth. Rising LIBOR could lead to a stronger U.S. dollar versus EM currencies. In Venezuela, the economic and financial situation will continue deteriorating hindering any further rally in its sovereign and corporate credit.

Special Report

Fed rhetoric is likely to shift in a somewhat more hawkish direction over the coming months as the FOMC starts to prep the market for a December rate hike. Against the backdrop of weak earnings growth and diminished share buyback activity, stocks have become vulnerable to a correction.

The lack of inflation makes a Fed rate hike before December unlikely. In the interim, the continued flow of liquidity could sustain the high-risk rally.