Morgan Stanley argues that investors should be wary about betting on a catch-up in EM assets as the global backdrop becomes less supportive
The firm says that current market environment is seeing the Fed no longer providing the same tailwinds for a weaker dollar, while the outlook for US fiscal stimulus remains uncertain and virus cases are rising again in Europe.
Adding that EM assets will perform well once a vaccine becomes available next year, but the risks surrounding the US election need to be navigated first.
In essence, this can also be applied to most commodity currencies and risk trades right now in my view. Flow into EM is essentially flow away from the dollar and that also ties back to risk flows and investor appetite in general in the bigger picture.
The warning signs are certainly there as evident by the dour mood yesterday, with other themes such as stretched positioning in major currencies against the dollar as well as added political uncertainty from the weekend all playing a role to start the week.
And things may yet be more complicated and filled with more uncertainty until we get over the US election hurdle in November.
