Global markets at mercy of dollar arrive at ‘fork in the road’

Bloomberg

Global markets have arrived at an inflection point, with the dollar’s fate poised to determine whether the extreme divergence in equities continues, according to Oxford Economics.
“There is a fork in the road,” writes Gaurav Saroliya, director of global macro strategy.
The shop is positioning for a weaker greenback, a development that researchers there say would allow non-US equities to catch up with the gangbusters growth in their American
counterparts.
Oxford favours emerging-market bonds as well as developed-market equities and cash, backed by the view that fiscal as well as monetary stimulus from Beijing will bolster the world’s second-largest economy and help fuel global growth.
Markets may already be sauntering down this road. The Bloomberg Dollar Spot Index fell 0.3 percent on Monday as the US announced that additional tariffs against China would be enacted in a week, and dipped again on Tuesday after Beijing announced retaliation. In addition, the MSCI All Country World Index (ex-US) has outperformed the S&P 500 Index for four consecutive sessions, its longest such stretch since mid-March.
The end of US market leadership would come at an inopportune time for most portfolio managers.
According to a Bank of America Merrill Lynch survey, investors went all-in on the divergence trade in September, with the share reporting an overweight position in US equities rose to its highest since the start of 2015.
Oxford points to signs that China’s economy is resilient, even if the benchmark stock gauge closed at the lowest since 2014 on Monday.
The annual growth of the Li Keqiang Index, a gauge of activity in the “old” or industrial Chinese economy, has been trending higher in 2018.