Emerging Markets Hit With Biggest Outflows Since December 2016

"EM FX never lies and a plunge in Brazilian real toward 4 versus US dollar is likely to cause deleveraging and contagion across credit portfolios."

In other words, the best indicator of imminent emerging market turmoil is shown in the chart below: if and when the BRL starts sliding, and approaches 4, it may be a good time to panic.

However, besides just the stronger dollar, turmoiling EMs are a symptom of another, even more serious condition: tighter financial conditions around the globe, which BofA's Michael Hartnett summarizes as follows in the context of the largest EM outflows since late 2016:

3% UST yields + $70/bbl. oil + rising US dollar = tighter global financial conditions = deleveraging in high beta, high leverage, low liquidity assets

And, as he did earlier this week, Hartnett repeats that "BRL remains key EM risk-metric...closer to 4 it gets the more EM deleveraging and potential for global contagion."

Finally, now that everyone realizes we are late cycle, what about that other trade that traditionally mirrors EM flows: commodities. Here is Hartnett on why one should start buying "Secular humiliation": "Late-cycle oil: commodities late-cycle & only asset class bar cash suffering secular humiliation (10yr rolling returns = -6.5%, worst since 1930s – Chart 4)."

And some more good news for commodity bulls: FX destruction in Venezuela & Iran indicates oil supply shock...

... which together with BofA's oil price target of $100, is not reflected in energy fund flows.

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