15.06.03 daily

US Treasury yield soared last night despite of struggling economic indicators including factory orders. While current indicators has not deteriorated, some investment banks forecast 2q gdp in US would be subdued at 2.5%. Market players see that last Yellen's comments started to pinch the market, especially in bond market, following bond yield to re-start to increase.

Since late last month, after Yellen's comment, US dollar turn around to appreciate and oil price to somewhat tumble and these caused emerging market assets to be dismal. But, last night was different. Though bond yield soaring seems to be caused by rate hike tantrum, US dollar appeared depreciation against euro in line with weakness at German bunds. Otherwise, oil price did not decelerated.

However, this picture is not abnormal in light of the case of 1994's. When Greenspan hiked fed funds rate rapidly, US dollar was not appreciated. Consumer prices maintained at low level and the economy excluding US, especially in Euro area, accelerated more than US, so EUR could be appreciated against US dollar.

And now? It looks like that case. Despite ECB continue QE, the economic indicators including inflation already started to improve since late last year when stress test for euro area's banks ended.

In this environment, it's sure that emerging market sovereign credit shows strong movement. In eastern europe, my coverage area now, the sovereign spread narrowed last night despite of US treasury yield increase under the burden of Fed rate hike that could drain liquidity from emerging market. The reason would be two. One is other liquidity conditions depends on ECB or BOJ should underpin global liquidity conditions. Another one is emerging markets' fundamentals are somewhat solid contrary to market consensus from bearish oil market views. If bear market of oil was already done, short-cover in oil-related countries would continue further. And without oil matters, we should re-valuate emerging countries' economic environments.

Geopolitical problems especially in Russia seems to be weakening since mid-last month, and about Greece woes, governors in Euro area could find clues, I think.

If then, market conditions since last year could turn around from deflation to inflation. And in this ample liquidity conditions, even if Fed start to hike the rate, should spur global economy toward reflation not secular stagnation.

In this environment, the condition for investment to emerging sovereign credit bond could be improved, I think.

In some countries in eastern europe, however, have some political problems.
It includes Turkey and Poland. But in Turkey, after this week's vote, capital inflows could be possible contrary to market consensus because this issue has been recognized in financial market for too long time. And in Poland, this could provide the opportunity for relative value trading, for example against Hungarian assets.

The worst country was Ukraine rather than Turkey or Russia. But, the sovereign spread in Ukraine narrowed recently and rapidly. It could provide a chance to get profit further.

In Russia and Turkey, from mid last month, financial market including fx, sovereign credit and local bond market show short-cover ended and bear market restarts.

But, I don't think this kind of bear market to be continued further. This is the chance to invest in emerging market, I think.