The financial divergence between US and the rest of the world, specifically Emerging Markets (EMs) continues to expand.

There are good reasons for US equity outperforming rest of the global markets, at least for the short term. US economy seems to be firing on several cylinders looking at the recent reports about manufacturing and services activities (PMI & ISM indices). Most of the large US technology companies are in a great sweet spot with high demand catapulted by the tax breaks, fiscal stimulus from last year. In addition US consumer confidence is riding high waves with rising wage growth (finally) and strong job market.

Surge in wage growth means that Fed will raise rates two more times this year and possibly a few more times in 2019 accompanied by quantitative tightening (selling bonds on its balance sheet ) to prevent the economy from overheating. The upsurge of such measures strengthens USD.

Rising USD has been exacerbating problems for Emerging Markets ( already in bear territory) as they have to service their hugely USD denominated debt. Emerging Markets’ fear are also concerning significant slowdown in US and China driven by current trade (tariffs) conflicts. EMs will be watching these developments with an eagle’s eye

The euphoria in US and fear in Emerging Markets is currently an ongoing phenomenon. There will be more to come on this subject.

In the meantime, it would be advisable to stay defensive with US denominated high quality (graded) investments.