By Simon Lack

Investing in emerging markets has become de rigeur for equity investors in recent years. If you like stocks, goes the argument, how could you not like stocks in countries where growth is fastest? It's probably fair to say that investing today with the objective of avoiding emerging markets is a more controversial approach than including them.

No doubt GDP growth and other measures of economic output are favorable in the BRIC (Brazil, Russia, India and China) countries than in the developed world. Frontier markets (for those who find mere Emerging Markets boring) are more loosely defined but include Argentina, Bangladesh and Croatia. Of course not every country gets promoted. The implicit promise is that an Emerging country will eventually emerge into the warm sunshine of the developed world. Sadly for Greece, it was recently relegated from developed and back to emerging by MSCI.

The faster growth

Gone, at least for now, are the days when economic and corporate fundamentals dictate market performance. Instead, the outlook for financial markets in the months ahead essentially comes down to the verbiage and potential policy actions resulting from single a policy meeting, as the Federal Open Market Committee (FOMC) of the U.S. Federal Reserve convenes their latest gathering on Tuesday and Wednesday of this week. Given its importance, it is worthwhile to explore the various potential outcomes and associated market reactions. For when it comes down to trying to manage a portfolio strategy around what someone might say coming out of a meeting, anything is possible.

Before exploring the possible policy outcomes from the FOMC meeting on Wednesday, it is worthwhile to revisit the significance of the outcome on the various respective asset classes. This exercise is particularly important given the fact that there appears to be a great deal

By Tim Seymour

Last week, emerging market equity fund flows were down for the fourth straight week with the largest outflows seen since the August 2011 bloodbath. China (FXI) was the big loser as the big winner in total outflow, with 21% of the net flow having 23% of the AUM. Russia (RSX), which has been slowly grinding lower all year, was 10% of the flow with 6% of the AUM.

In Latin America, Brazil (EWZ) remains the biggest loser with 16 straight weeks of declines. It carries the torch for all investors in terms of disappointing results. Mexico (EWW) remains a place where the crowded trade might still be somewhat offset by the heavy presence of local pension funds that keep a bid to the flows side. Colombia (GXG) showed its second consecutive outflow and, along with Mexico, is the only one that is positive in the second quarter.

The long-term economic and structural cycle is still dollar bullish based on a stronger relative growth potential and improving fundamentals. Much-reduced asset flows into emerging markets also strengthen the case for a dollar advance. The key question is whether it has corrected far enough from an over-bought position, and there is now a strong case to suggest that it has following the retreat to four-month lows on a trade-weighted basis. After pricing in too much, too soon, the dollar again offers good value at current levels, especially above 1.3350 against the euro and weaker than 1.57 against sterling.

1. The latest IMM positioning data recorded a sharp reduction in euro shorts to a net figure near 7,000 compared with over 50,000 the previous week. The euro did gain ground during that period, although advances were measured, which suggests that there was plenty of supply to absorb the buying pressure. The

By Amine Bouchentouf

Ever since China entered into its series of five-year economic plans in the late 20th century, it's not a stretch to argue that its economic rise has been one of the most impressive in human history. Growing at close to double digits per year, China is lifting hundreds of millions of people out of poverty and has embarked on one of the greatest industrialization phases the world has ever known.

As I've been writing for more than a decade, China may be the most important factor influencing key industrial commodities such as iron ore, copper, and coal. China is already the biggest consumer and/or producer of the above-mentioned commodities, and its influence on other natural resources is expanding on a daily basis. In this installment, I will examine the quiet but steady role that China has had in the gold markets in recent years. Many market participants

By Tim Seymour

The charts tell you what you need to know about asset flows, quantitative easing (QE), and the impact on emerging markets.

I have chronicled emerging markets’ underperformance to the S&P 500 (SPX) numerous times in the last few months, highlighting what appeared to be key levels while also expressing disbelief in the extreme underperformance of the asset class.

Recently I drew a line back to 5 years to show the price relationship between the MXEF (EEM) to the SPX. (See chart 1)

Chart 1

After underperforming the S&P by 60% from the point of peak emerging markets outperformance, emerging markets equities are very near the level (on a relative basis) they were when they began a massive outperformance to SPY in late 2008.

Emerging markets bottomed first and in the early days of stimulus and QE1, risk assets and commodities were bid higher than U.S. assets.

It

Following our previous look at trade between the United States and China, we believe we've sorted out much of what happened with China's exports to the U.S. in March 2013.

Here, it appears that much of the fall in the year-over-year growth rate of China's exports that we observed in March 2013 was really tied to the timing of the Chinese New Year/Spring Festival holiday, which effectively ran during the week from February 9, 2013 through February 15, 2013. The late timing of this holiday in 2013 then impacted the volume of cargo from China reaching the U.S.' west coast ports in March because of the 1-1/2 to 3 week long transit time to reach them.

This factor also explains why the year-over-year growth rate for China's exports to the U.S. in February 2013 was so high. The earlier timing of the Chinese New Year/Spring Festival holiday in

With the stock market's strength in 2013, the question on the minds of many investors is how much of this is due to economic strength and how much is due to central bank activities.

While asset prices can be distorted temporarily by stimulus and the anticipation of stimulus, there are some measures that are driven purely by supply and demand. One such measure is scrap metal prices, and it happens to be Alan Greenspan's favorite economic indicator.

Scrap prices, like the stocks of many industrial companies, have not really enjoyed the same type of recovery as other assets. In this article, I want to discuss how scrap prices continue to trend down, undermining thoughts of a healthy recovery.

One reason, for Greenspan's use of scrap prices as an economic indicator, is it is free of speculation and an effective measure of demand from industrial companies. Most scrap metal in the

By Tim Seymour

There was a slew of data from China (FXI) over the weekend, and the bottom line isn't anything for bulls to run with. Particularly distressing were China export numbers coming in +1%, after a +14.7% in the previous month sent the mixed signal that

John Maynard Keynes once famously said: "When the facts change, I change my mind. What do you do sir?"

Last week we noted structural bearishness on Japan - due to the inevitable failure of Abenomics - and in turn expressed a bullish trading view on Treasuries. That view shifted quickly after the "Goldilocks" jobs report.

An ugly jobs report, coupled with meltdown concern in Japan, could have ignited a "risk off" fireball that powered U.S. Treasury Bonds higher. But we didn't get that. Instead, the potential power of a one-two bearish combo was negated by an almost ideal result on the U.S. employment side.

Not ideal in terms of a healing US economy, but rather, a sickly-yet-improving economy that remains just weak enough for the Fed to stay its hand …

This result led to UST whackage, a surge in the major U.S. indices - S&P 500 Trust (SPY), SPDR

Most countries report economic data over a course of a month. China releases most of it in a couple of days and this weekend was such a period. To summarize, China reported weaker imports and exports, but a larger overall trade surplus, lower inflation and weaker bank lending.

Industrial output, retail sales and fixed asset investment were in line with expectations and suggests the world's second largest economy is expanding in line with the first quarter pace of 7.7%. The government targets 7.5% growth this year and is unlikely to provide fresh stimulus for the economy.

China reported the May trade surplus widened to $20.43 billion from $18.16 billion in April. China's trade data is among the most controversial of its reports. The government recognizes that the trade account was being used to conceal capital flows and last month began cracking down. A Bloomberg poll found that the consensus among

When President Obama meets new Chinese President Xi Jinping in California on Friday, it will be a big contrast from his first official meeting with the previous leader, Hu Jintao, back in April 2009. Then, China was still basking in the afterglow of the 2008 Beijing Olympics when its spectacular opening ceremonies and its pace-setting 51 gold medals declared that the country had arrived on the world stage. China responded to the financial crisis with a massive stimulus package that focused heavily on infrastructure and construction. That kept its GDP growing in the high single digits while the developed world was heading south. When the global economy began recovering, China's real GDP growth topped 10% in 2010.

But last year, China's GDP growth was 7.8%, the weakest since 1999, and it will probably match that this year. The Conference Board projects China's GDP growth will average 5.8% from 2013 to

The Chinese economy has changed dramatically over the last three decades. While its per-capita income was only a third of that of Sub-Saharan Africa in 1978, it has now reached an upper-middle income status, lifting more than half a billion people out of poverty. The numbers are dramatic: per capita income has doubled for more than a billion people in just 12 years. What was once a primarily rural, agricultural economy has been transformed into an increasingly urban and diversified economic structure, with decentralization and market-based relations rising relative to the traditional government driven command-based economy.

This extraordinary pace of transformation is poised to continue over the next two decades, as outlined by my World Bank colleague Philip Schellekens in a recent Economic Premise - A Changing China: Implications for Developing Countries. The Chinese pattern of rapid growth with structural change has been accompanied by rising economic imbalances,

From April through May, I published a series of articles advocating the purchase of U.S. equity market puts. My initial position was established April 11th, with the roughly 3/4s of it being closed out one week later. It was my best trade to date. My timing was initially impeccable; however it was also extremely short-lived. From there it became an exercise in poor risk management as gains became losses as I added to the position on successive moves up. I blindly discarded stops I had set, and rather than having a great trade on the recent pullback, it turned out to be just a mediocre one overall.

In retrospect, the strong move through 1600 in the S&P 500 (SPY) should have been a clear sign to reduce or temporarily close my short exposure. Trading is always easy in retrospect, but such is life. Clearly I anchored myself to my original

A diverse range of asset classes have been left shaken in recent weeks by a spate of violence that has spread across investment markets. The first to get taken out at the beginning of the quarter was the metals and commodities markets. The next victim roughly a month ago was the broader fixed income complex. And in recent days, fear has struck close to the heart of policy makers in selected segments of the stock market. With an increasing number of asset classes falling down, it is important to question whether the few remaining categories left standing might be next.

So what exactly is this asset class serial killer wreaking havoc on investment markets? It is the Japanese government bond market. It all started innocently enough on April 4 with the announcement by the Bank of Japan that they intended to embark on an extraordinarily aggressive quantitative easing program that

There have been two overreaching forces that have driven the global capital markets in recent weeks. Within the context of substantial positions established on the basis of both U.S. and Japanese unorthodox easing, the markets have responded dramatically to speculation of near-term Fed tapering and concerns that BOJ is caught in a contradiction; a reduction in the dangerous volatility in the bond market has come at the price of a stronger yen and weaker Nikkei.

These forces remain very much in play. The Nikkei slumped another 3.7% to bring its 10-day decline to 17%. Today's decline was led by a 6.1% decline in financials and a 5.2% decline in consumer services.

The yield on the 10-year JGB eased 4 bp, while the dollar fell to almost JPY100 and recorded its lowest level since May 9. This general area provided formidable resistance on the way up and is expected to offer

All it took was someone to whisper "Fed tapering" and volatility has returned with a vengeance to the markets. I explored this topic in late April (see Sell in May?) and outlined various criteria for getting bearish. For now, most of them haven't been met, which means that I am still inclined to give the bull case the benefit of the doubt.

Surveying the Big Three global economies (U.S., Europe and China), I see signs of healing - which suggest that markets are likely to continue to grind higher, albeit in a volatile fashion. Let's take the regions one by one.

U.S.: Muddling through
As I mentioned, I outlined a number of bearish tripwires in my previous post Sell in May?

• Earnings getting revised downwards, or more misses in earnings reports;

• More misses in the high frequency economic releases;

• Major averages to decline below their 50 DMA; and