We are approaching the end of the semester & it is becoming pretty stark it is the end of the line. We have Fall Break next week & when we return, there is just one & a half weeks of classes before finals. We are discussing the final presentations for clients in many of many meetings. For many students, it will also be the end of their Masters program & graduation is close. It really feels like the end of the line.

It may also be the end of the line for the Fed. Some at the Fed, led by Brainard, are talking up that idea. Others, led by JayPo, are saying 'not so fast'. The mkt certainly is starting to think so as the terminal Fed Funds were 5.1% right after the Nov FOMC & are now 4.9%.

You see it the most is in the US Dollar. Dollar strength has caused a bit of damage in countries & companies around the world that are short $ because they borrow in $ against their export revenues but end up short when those revenues decline. After almost a 20% move higher this year, the $ has pulled back 7% from the highs. That is not a small move on its own.

When I see the $ move like this, my first instinct is to ask what is driving it. Is it relative interest rate differentials? The obvious place to look is US vs. Japan given relative policy decisions. At the peak, the spread between bonds and JGBs hit 4%. It is now down to 3.4% suggesting a top is in.

It may also be due to my preferred forecasting tool of FX which is relative growth rates. In the past couple of weeks, the idea of a US recession has really crept it. This has been echoed by retailers like TGT & KSS this week which are telling you US consumers are slowing a lot. The US PMI is finally catching up (down) to the PMIs in the EU, China, Japan, Korea etc.

My second instinct on big dollar moves is to look at the relative performance of EM to the US. This is very sensitive to the Dollar as EMFX & EM stocks/bonds are very highly correlated. Weak FX means weak stock & bond mkts as capital flows out. The converse is true. EEM should start to do better vis a vis SPY if the Dollar has indeed begun to top.

One problem with EEM (in blue), though, is the heavy exposure to China. With Xi Jingping's Common Prosperity & crackdowns on the successful, it is not clear at all that shareholders (esp. US shareholders) will be allowed to be rewarded over Chinese workers & consumers. As a result, I also looked at an index I created with just Mexico & India. In my podcast on Substack I spoke about India, the tremendous demographics & tailwinds to the economy. Mexico is benefitting again from USMCA & the reshoring/near-shoring of businesses to North America. If you look at this index in white, it has always tracked the EEM very closely. This year there has been a decoupling. In fact, Mexico & India combined are up on the year.

Even in bear mkts there are things to invest in.

Stay Vigilant

#markets #investing #emergingmarkets #dollar