The coming sell off in global equities!

Dubai - Investors should expect volatility to rise in the second quarter as there is a disconnect between the strong US data momentum (457 new jobs in February and March 2016 alone with the PCE inflation gauge at 1.7 per cent!) and Janet Yellen's rhetoric.

While the S&P500 fell only 1.2 per cent last week, things will get uglier in April and May. Fed chair Yellen is playing with fire in talking down US interest rates and inflation risk. The Volatility Index (VIX), Wall Street's barometer of greed and fear, does not capture the rising global financial and political risks at only 15. Market breadth, sector divergence, smart money flows, sentiment, leadership, bank shares and negative distribution stinks. Earnings will contract at least eight per cent as margins sag. The yen is at 108. Valuations are expensive at 17.4 times earnings that will contract, not grow in Q1 2016. As M.C. Hammer once put it, can't touch this!
Investors should expect volatility to rise in the second quarter as there is a disconnect between the strong US data momentum (457 new jobs in February and March 2016 alone with the PCE inflation gauge at 1.7 per cent!) and Janet Yellen's rhetoric. The financial markets have derated global growth projections, the reason Uncle Sam's ten-year note trades at a mere 1.70 per cent. Yet the next twist in US inflation and interest rates is higher, as regional Fed presidents Lacker, Williams and Bullard protested in their call for a April FOMC rate hike, a public rebuke to Dr Yellen. This is bad news for global equities.
The Doha meeting between Saudi Arabia and Russia will decide if Brent crude falls back to $30 or resumes its epic short covering rally. The US Dollar Index is also at critical support levels at 94. This is the reason I have turned negative on the near term prospects of the Canadian dollar and Asian/Brazil currencies. Negative interest rates, a malaise in Abenomics and the yen shock have slammed Japanese equities by 15 per cent for US dollar investors while Brazil and Canada, with their mining/energy tilt were the two stock markets and currencies to own since February 11.
Europe has been disaster in the past month, as the Euro has risen to 1.14 and inflation expectations have plummeted, leading to a bear market in European banks/insurers. A Black Death in global financial stocks, the largest sector in the world, is not exactly a positive omen for global equities. Nor is the softness in Chinese PMI and metrics of global trade.
This is only the surge in emerging Asia's currencies is unsustainable, a clear opportunity to make money by shorting the Thai baht, Malaysian ringgit, South Korean won, Japanese yen and Chinese yuan. I am more sanguine on the Indian rupee, which I would buy at 67 for a 64 target, as the Union Budget clearly gives Dr Rajan space for monetary easing, though a rise in the CPI above five per cent precluded a 50 basis point rate cut in April. Indian rate sensitive stocks remain stellar value buys even as Modi's crackdown on tax evaders and offshore black money (Netaji McMansions is phoren lands, as the Panama Papers reveal, are not easily hidden).
Strong economic data, the oil rally and monetary sweet nothings led to the 230 point rally in the S&P500 from its February 11 bottom. Yet I doubt if April will be so benign to American equities, as China, crude, credit, currency (dollar) and contagion (the five deadly 'C's) that inflicted such havoc on global markets in January resurface again. I expect the dethroned King Dollar to rise as Wall Street prices in a June rate hike. The Philly Fed data argues that US manufacturing has bottomed while the consumer economy, 70 per cent of GDP, is on a roll. The US consumer price index has begun to rise above two per cent and wage growth is the next macro trend that will spook the bond market. The rebound in stock prices in March was driven by short covering, not real money and fresh positioning.
The second successive week of declines in US equities despite s snapback in crude oil puts the onus on first quarter corporate earnings/guidance. The threat of intervention by Japan's Finance Minister has also hit the yen bulls at 108, which makes the Japanese stock market a value buy at Topix 1250 after its recent brutal correction. The easy money in Russia, Brazil, India and Philippines equities in 2016 is now over. Argentina's $12 billion sovereign jumbo deal is a historic win for the center-right President Macri after decades of Peronist misrule. The peso devaluation, subsidy reform, the "holdout" legislation, a credible anti-inflation program. Like the Obamas, time to tango on the Rio Plata, though only at a eight per cent yield, por favour!

Ceylon/Serendib is a teardrop-shaped island in the Indian Ocean that has enthralled me ever since I visited the hill resorts of Nuwara Eliya and the exquisite ruins of Anuradhapura as a boy. The tragic, terrible civil war against the Tamil Tigers (1983-2009), the Asian tsunami (2004) and the 10-year autocratic "family business" rule of ex-President Mahinda Rajapaksa were a nightmare for Sri Lanka. Yet Sri Lanka's political transformation has not been rewarded by the financial markets.
In January 2015, President Sirisena has replaced the pro-China Rajapaksa clan and marginalized them with a victory in the August 2015 parliamentary election. Sri Lanka finally has a government committed to democratic principles, privatisation and economic reform (Colombo as the Indian Ocean's new Dubai and Singapore? Why not?) reconciliation with the Tamil ethnic minority after the human rights trauma in Jaffna when the military vanquished the LTTE in 2009 and killed Velupillai Prabhakaran.
Sri Lanka's economy, reliant on tourism, tea exports, a construction boom, services and remittance from its diaspora in the Middle East, delivered annual 6.5 per cent growth between 2002 and 2015, despite the civil war, tsunami, foreign debt crises, terror attacks and political vendettas among the elite. GDP growth in 2015 will not meet the finance ministry's 7.5 per cent target due to a shrinkage in world trade; Sri Lanka could well deliver 6.5 per cent growth. The new government has also slowed Rajapaksa's Beijing-financed infrastructure and vanity white-elephant projects as it launches probes into the endemic corruption of his decade in power. While the rupee has sagged seven per cent against King Dollar and the oil crash will hit Gulf remittance flows, growth will be boosted by a fall in interest rates, export competitiveness and robust consumer spending. Sirisena's South African-style Truth and Reconciliation Committee can help heal the wounds of the past and attract Washington/London since the UN has applauded the initiative. Sri Lanka also plans constitutional reforms to reduce the power of the executive and empower the legislature so that the arbitrary, corrupt political culture of the Rajapaksa era never again reappears.
This $80 billion economy will be the next Asian frontier Tiger since I believe the Indian Ocean will replace the North Atlantic and the Med as the focal point of Great Power rivalries in the next decade. Prime Minister Ranil Wickramasinghe's state visit to Japan has elicited the promise of concessional loans and Sri Lanka, which has never defaulted on its external debt even during the civil war, has established an impeccable reputation as a sovereign issuer in the Eurobond markets since the victory over the LTTE in 2009.
Sri Lanka issued a $1.5 billion 10-year sovereign bond that paid a rich 6.875 per cent US dollar coupon in October. This bond was widely allocated to US/Europe-based emerging markets funds since only seven per cent of the new issue was given to pension funds, insurance companies and private banks. Yet emerging debt funds were desperate to sell bonds en masse as investors redeemed out of the high-yield-debt asset class after the Chinese yuan, Third Avenue and Lucidus Capital shocks. So the Sri Lankan new-issue bonds have fallen to 93.50 to yield a stellar 8.3 per cent and enable leveraged investors to lock in a 15 per cent annual US dollar return. I do not want to gloss over Sri Lanka's financial risk metrics; Standard & Poor's rates Sri Lanka as only a B+ credit, while Moodys is B1. Foreign exchange reserves fell from a peak of $9 billion in 2014 to below $7 billion, forcing the central bank of Sri Lanka to negotiate a $1 billion currency swap line with the Reserve Bank of India. There is no way the government will meet the Finance Minister's target of a 4.4 per cent budget deficit and debt/GDP ratios are still too high at 72 per cent. Yet like Benigno Aquino's Philippines, I believe Sri Lanka is on the path to at least two sovereign credit upgrades if it can implement its reform agenda now that it dominates Parliament. Sri Lanka, like Northern Ireland and Bosnia in the late-1990s, is a beacon of hope for all of us who are disgusted by ethnic/sectarian hate in the global human family. 
Despite the 2010-11 market bubbles, Sri Lanka's "peace dividend" is not yet reflected in its international bond. The terror threats in the Sinai and Bodrum/Antalya will benefit Russian tourist arrivals. Bank loan growth will boost valuations. The Colombo Port project can well attract $10 billion in FDI, as can Jaffna's reconstruction. My dream? Sri Lanka as an investment grade credit one day!