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A return to rationality
Weekly investor research
10 February 2014
The market’s two largest convictions going into 2014 were a stronger US and a crisis in Emerging Markets (EM). Both these
views are unravelling. US manufacturing dropped sharply following two quarters of significant inventory accumulation.
US non-farm payrolls disappointed for the second month in a row. If this run of US bad data continues the markets will soon
begin to ask why the Fed began to taper. Meanwhile, money is still flowing out of EM. Why does weak US data matter for
EM investors? Not because EM needs QE flows or low US treasury yields. After all, most of the QE money went into the
US stock market, developed market bonds, and G3 currencies. Also, EM rates already price far higher Treasury yields than
we will see this year. No, the real importance of these weak US numbers is that they help to restore rationality. The irrational
selling of EM over the past 10 months has only been equalled by the build-up of irrational exuberance about the US outlook.
Now, perhaps, we can begin to hope for a return to rationality.