Inflation, China and Emerging Markets

In higher inflation environments, money flows typically begin to head into emerging markets. This is primarily due to the fact that many of them are commodity producers. When looking at capital flows into EM-nations and real treasury term premia, it is this capital flow which is partly responsible for driving up interest rates.

When taking this into account, it is expected that continued flow into emerging markets will keep interest rates elevated.

However, there is an increasing relationship into capital flows into emerging markets and China’s monetary policy, which to say the least is non-consistent.

We believe the late-cycle inflation in the U.S., plus the likely even that China could face another liquidity crunch, the outlook on EEM is neutral. Although, price momentum is strong the rapidly declining volume is a key signal that a bull trap could be in place.

Key risk ranges available on chart.