Recent FOMC actions and confusion about the outlook for FOMC moves, is somewhat hurtingthe appetite for EM risk. Strong performance y-t-d makes EM susceptible to some profit taking.
We point out however that as the Fed might bring forward balance sheet reduction to the 4Q18,the Fed might keep a soft tightening cycle ahead, supporting HSBC view of moderate Fedfunds rate tightening cycle, as well as relatively soft USD and low UST 10 yr yields. In fact,HSBC Economics now sees the next Fed 25bps rate hike by the end of the year and justanother 25 bps hike in 2018, while HSBC FX Strategy perceives the new FOMC policycombination unsupportive of the USD. Moreover, HSBC Fixed Income strategy highlights thatrecent Fed actions and outlook with respect to the fed funds rates are priced so upside risk toUST yields should be limited. Moreover, we take comfort that cross asset volatility remainssubdued, Eurozone growth outlook is improving, and the ECB and BOJ are not in a hurry toabandon their current loose monetary policy stance, all supportive for EM. Overall, we remainconstructive on EM and continue to see dips as an opportunity to add to EM risk.
Inflows to EM bond and equity funds continue for the twentieth and thirteenth consecutiveweek, respectively, in the week ended 14 June. Within EM bond funds, Brazil, Mexico, Russiaand Indonesia attracted most inflows in USD terms, whereas India and frontier markets led in %of AUM. Among EM equity funds, India funds grabbed the most, in USD terms, while Vietnam,Taiwan and frontier markets saw largest inflows in % AUM. Strong ETF and institutional fundsflows supported EM bond and equity funds (p.13). In DM, US, Global and European funds ledgains among bond funds, while US and Global funds grabbed the most among equity funds.
Daily financial account portfolio flows show surges in inflows to bonds (seven countries), mainlyS. Korea and India, and inflows coming back to equities (eight countries), mostly India andPhilippines (p. 15). Meanwhile, HSBC’s early signalling system points to constructive yetsoftening demand for EM funds (p. 14). Similarly, EM fund flows momentum (p. 5) anddispersion indicators (p. 8) show some easing in appetite for EM risk.