Key contributors to this week’s Markets Call:Gabriel Gersztein, Head of GM Latin America Strategy & CommodityQuant Strategy 2Key contributorsCross-Asset Strategy – BNP Paribas London Branch Robert McAdie Global Markets Head of Strategy Research44 20 7595 8885 robert.mcadie@uk.bnpparibas Michael SneydGlobal Head of FX Strategy & Cross Asset Strategist44 20 7595 1307 michael.sneyd@uk.bnpparibas Pierre Mathieu Cross Asset Strategist44 20 7595 8730 pierre.g.mathieu@uk.bnpparibas Benedicte Lowe Cross Asset Strategy Graduate44 20 7595 1993 benedicte.lowe@uk.bnpparibas Kris Gjini Cross Asset Strategy Graduate44 20 7595 1603 kris.gjini@uk.bnpparibas DateQuick links to previous webcasts27-Jun-18 Positioning for an improving European outlook20-Jun-18 Volatility Outlook: FX leading the pack13-Jun-18 Identifying opportunities using our cross-asset factor model MarFA06-Jun-18 Commodity outlook: Impact on inflation and markets23-May-18 Q3 Outlook and Asset Allocation: Shifting Perspectives16-May-18 Market implications of higher global rates02-May-18 Impact of higher USD borrowing costs25-Apr-18 EM opportunities amid higher rates18-Apr-18 Long term rates – low for longer11-Apr-18 Market volatility and risk positioning21-Mar-18 Cross Asset Views and Asset Allocation for Q214-Mar-18 Global trade wars – market implicationsSources: Bloomberg, BNP Paribas An underline denotes a change from the previous callEmerging Markets – bear market opportunities 3Trade wars are spreading to currency wars with the RMB getting weaker despite officialcomments from China that FX should not be used as a tool in the current trade dispute.The RMB has devalued by 6.5% since April of this year versus the dollar. As a result, in spite ofthe imminent 10% US trade tariff on imports worth $50bn from China and potential further tariffsof $200bn on Chinese goods, Chinese exports would still be approximately 2% cheaper due tothe RMB devaluation.Stronger USD and higher USD Libor rates have contracted USD liquidity causing USD EMfinancial conditions to tighten. That said, versus the RMB, commodity based EM currencieshave depreciated by close to 10% since the start of the year which continue to support theircommodity trade channels with China.US economic growth continues to strengthen vs the rest of the world and represents abigger share of global growth. This should continue to be supportive for the USD in the shortterm.Despite the recent rise in 10yr rates,US real rates continue to trade below 80bp andshould remain supportive of emerging markets and other risky assets. Whilst a strongerUSD remains a headwind for EM the actual rise in the Broad Trade Weighted USD over the lastyear is 1.7%, which should not be a significant headwind.The flattening bias on the US 2s10s is expected to continue as markets have not yet adjustedto rate levels implied by the Fed dots with at least another two hikes to come. Furthermore,long-end yields should be weighed down by the potential drop in the US fiscal impulse by 2020as the full effects of the tax cuts and spending hikes make their way through the system.Higher oil prices are expected to continue to push headline inflation higher. Labourmarkets in the US continue to tighten with wage gains continuing to pick up. As such, we are ofthe opinion that investors who agree with this view may consider going long inflation breakevensor inflation swaps.EM earnings expectations have fallen since the beginning of the year, but forward P/E’s arelower as equity prices have fallen at an even faster pace. That said EM equity profitability andERP have both improved making EM equities attractive at current levels with a largedegree of dispersion.The unwind of the EM carry trade has lead to a correlated sell-off in EM bonds. Going forwardwe see greater differential based on fundamentals, which should drive up dispersion.Trade of the week: Investors who agree with us could consider receiving rates in Brazil.03/07/2018 LDNclose1-month prognosis Prognosis vscurrent EURUSD1.16561.1550-0.91% GBPUSD1.31871.3100-0.66% USDJPY110.83108.00-2.55% 10y Gilt1.27%1.40%0.13% 10y Bund31 bp4514bp 10y Tsy2.87%3.10%0.23% 10y JGB3 bp52bp S&P2,7272,700-0.98% SX5E3,4143,400-0.4% SX7E 110.9115.03.67% FTSE 1007,5947,6000.08% Nikkei 22521,78622,4002.82% Gold1,2471,2752.26% Oil (CL1)74.8750.28% Itraxx Main S297365-8bp Itraxx Xover S29319300-19bp CDX IG S306865-3bp 4Chart 1: Recent improvement in USD funding costs may providesome respite for EM FX after a very poor start in 2018 Chart 2: EM financial conditions have tightened markedly drivenby higher CDS spreads and currency depreciationChart 3: The combined headwind of a stronger USD and weakereconomic data have caused EM to underperformWeaker economic growth coupled with a rise in the cost of dollar fundinghas tightened EM FCONsAll sources: Bloomberg, BNP ParibasEM financials conditions have tightened, led by wider creditspreads, rising volatility and weaker EM FX. A weak domesticcurrency makes USD debt repayment more expensive and putspressure on dollar lending, leading to further contraction in financialconditions.The combination of a stronger USD and weakening economic datahave created a deteriorating backdrop for EM. Longer term, we doexpect the USD to weaken with an improvement in EM economicstrength.Falling EM Economic Strength Index Rising EM Economic Strength IndexRisingUSDFallingUSDJune-3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% -2-1.5-1-0.500.511.522.5 2018↑ USD↓ Economic datam/m change in USDm/m change in EMeconomic strengthTighter FCON indicator is a majorheadwind for EMsLess pressure ondollar funding maylead to improvementin EM FXOutperformUnderperform 。。。。。。