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<\/figure>\n\n\n\nWe continue to favour EM local currency debt given US dollar weakness and attractive inflation-adjusted yields in many emerging markets.<\/p>\n\n\n\n
Global economic growth continues to soften, with the US having experienced last quarter the most noticeable downward revisions to growth expectations. However, the global economy continues to exhibit a remarkable resilience in the face of the recent geopolitical and trade war related dislocations. Emerging market (EM) growth differentials are improving versus developed markets.<\/p>\n\n\n\n
The global disinflation trend seen over the past two years remains firmly intact. Most EM countries are reporting favourable inflation data. This trend looks sustainable, supported by the deflationary pressures emanating from China, strong exchange rates, and our projected decline in oil prices to the mid-$50s, as geopolitical risk premiums fade and supply remains abundant. EM central banks have considerable room to cut rates from their current historically elevated levels.<\/p>\n\n\n\n
Our measures of global financial liquidity are reaccelerating after a brief dip last quarter. There is ample liquidity in the global financial system as evidenced by a resurgence in global monetary aggregates (i.e. measures of the amount of money in circulation in an economy), improving credit impulse indicators and reaccelerating foreign exchange (FX) reserves growth. This provides a positive backdrop for risk assets, especially for EM debt which is starting to experience a recovery in inflows after years of substantial withdrawals of capital by foreign investors.<\/p>\n\n\n\n
The cyclical US dollar downturn is still in its early stages despite short-term sentiment indicators suggesting that the greenback is somewhat oversold. Persistently expensive US dollar real effective exchange rate valuations, high and deteriorating twin deficits and the US net international investment position exceeding -80% of GDP should continue to put pressures on the dollar, which is in the process of breaking its long-term 15-year uptrend.<\/p>\n\n\n\n
The outlook for commodity prices remains mixed. Oil prices are likely to be soft given ample supply. The outlook for copper prices remains constructive and the conditions for the continuation of the gold bull market are firmly in place.<\/p>\n\n\n\n
Geopolitical risks have eased, with the prospect of ceasefires in the Middle East and the lower intensity of the Ukraine war. Despite this de-escalation, higher defence spending is likely to strain already fragile fiscal dynamics in developed countries.<\/p>\n\n\n\n
We hold a tactically positive view on US government bonds, supported by significantly cheaper valuations of longer-dated US Treasuries. They also remain prone to short-covering rallies, if investors who have been recently betting aggressively against them look to buy back in to cover those positions. This could equally boost returns for several EM government bonds. Nonetheless, we are mindful of key downside risks emanating from the US bond market, particularly given the fiscal imbalances and the potential for an inflation resurgence driven by the delayed impact of recent trade tariffs. A breakout above the upper bound of the recent yield range (specifically the 5.1% level for the US 30-year) would be an early warning signal.<\/p>\n\n\n\n