A New Shanghai Accord Is More Important Than The Fed Pause

There we go again, a binary outcome awaits as we head into G-20 meeting. Mehul Daya and Neels Heyneke of Nedbank explains is their Macro Strategy note:

At the G20 meeting in Shanghai in February 2016, policy makers pledged to boost economic growth and restore stability to financial markets. This was in the midst of global economic growth faltering and as financial markets were grappling with heightened volatility amid fears of deflation. Stock markets were under pressure, the US bond was rallying and EMs experienced large outflows. The strong US dollar tightened global financial conditions considerably.As a result of the globally coordinated effort by policy makers, i.e., the “Shanghai Accord”, a risk-on phase ensued. This led to a weaker US dollar (easing financial conditions), triggering an outperformance in many risk assets, in particular, EMs.

G-20 might have lost its relevance as leaders can't even agree on joint communique, but we need another shanghai accord to ease high levels of economic policy/geopolitical uncertainty as can be seen in the chart. There is another issue of contracting dollar liquidity as the Fed continues to unwind its balance sheet.

Nedbank concludes “We are skeptical about whether a “Buenos Aires Accord” could be re-engineered again, for the following reasons:

1. The rise in geopolitical tensions
2. Global US dollar shortage
3. Expectations of tighter monetary policy by global Central Banks
4. The contraction in China’s credit cycle

Their Investment recommendation: “We have been underweight risk assets in 2018 and advise investors to remain conservative in their asset allocation towards risk assets going into 2019 unless there is a consensus among global policymakers to boost liquidity“.

My two cents. A G-20 accord even remotely like Shanghai will give new lease of life to markets and possibly a new high in US markets irrespective of the Fed stance and rate hike in its December policy.

After all, the availability of LIQUIDITY is more important than the cost of liquidity.