From our friend Jonathan Auerbach: Please click on the thumbnail panel to imbibe some remarkable emerging market rate expectations by our friend Mike Churchill of Churchill Research. Mike’s thesis is that the rate hikes in China Tuesday were destined to happen, hardly an anomaly in a ‘strong’ global economy, and he expects many more such hikes across the emerging world over the next year. These increases should result in highly divergent historical spreads between US Fed Funds and all other global rates, save the ECB and Japan, and continue to provoke increasing liquidity to flow into EM fixed income in search of higher returns and similarly into EM equity markets. Thematic implications (unintended consequences?) we should all consider are that EM Central Banks may indeed respond with capital controls as Brazil did recently; if indeed the hikes are a sign of economic strength at what point is the US dragged along; and how will gold and its equilibria to all commodities react given the knee-jerk performance Tuesday.
