The Secong Leg Down?

Cross Border Capital are experts in analysing global liquidity across the public and private sectors. In this note They say that the latest madness in markets centres less on the price of ‘risk’ assets and more on the valuation of ‘safe’ assets. For a couple of months now, CBC have argued that US safe assets – the US dollar and US Treasuries – have been 10-20% expensive. As they adjust, more traditional risk assets will similarly adjust downwards in price, much like previously occurred in 1987 and 1994, CBC say in this report. The obvious question is: Whether this will be an orderly exit or a Crash?
The answer largely depends on capital flows, says CBC. Whereas the market is focussed more on the negative effects of perhaps US$450 billion of prospective ‘reverse QE’ by Central Banks in 2018, CBC’s worry centres on the odds that US$3 trillion of cross- border ‘flight’ capital would exit even quicker. With the US dollar already down sharply in 2018 and US 10-year bonds testing 3% yields, much damage has already been taken, the report says. However, two continuing factors remain of concern: (1) Treasury term premia – the key valuation metric for bonds – still look too low, and (2) major Forex reserve managers are pondering their long-term commitment to the US dollar amidst a growing interest in the Chinese Yuan. This shift is unpredictable, but it does seem inevitable, conclude CBC. They add that investors should watch the success of the planned Shanghai oil futures contract in March as a bellwether. This note can be