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Equities are largely pricing in a recovery in China leading to a pick up in global growth, as shown below by the correlation between China's PMI and $SPX YoY. 
The same is true for global equities, as shown below. $ACWI
That said, we are not seeing the subsequent pick up via China's largest trading partners.
This is showing up in the global PMI, which has yet to recover similar to what we have seen in China, and is showing a much different picture of where equities should be priced.
The counter to this thought process is that China leads the world, thus the global PMI should pick up. To this point, I would point to China's M1 vs. the global PMI, illustrating we have 5-6 months before the global data bottoms.
Let's assume I'm wrong, and China is picking up and about to drive global growth materially higher. Why are the currencies of China's largest trading partners significantly weakening? The last time China bottom, these currencies were materially strong.
The reason they were higher last time is due to China's material credit expansion, as shown below. Last month we saw the first YoY uptick in aggregate credit YoY, which sets the clock for 9 months for the economic data to bottom (Q4), assuming it continues higher.
The China optimists will point to financial conditions improving and Chinese short rates. To the first, financial conditions are largely a function of equities prices, so we'll throw that feedback loop out. On the second, we have seen a large divergence between short rates and M1
This is due to the large scale deleveraging in off balance sheet products and non-bank financial institutions that has pulled M1 lower, as shown below. It's our view (working thesis), that this was and is a large scale source of import demand, hence why trading partners weak.
This likely leads to the re-emergence of China slowdown fears (twilight period) from now into the end of summer that weighs on risk assets. That said, if China is able to continue expanding M1 and does not have -ve financial ramifications, EM will be extremely attractive in Q4/Q1
This is due to growth differentials driving the dollar (hence why dollar strong currently). US will likely continue to slow through Q4, while the rest of the world begins to pick up steam and excess liquidity improves (Q4).
Hope this helps. Stick to your process, not price.
Hope this helps. Stick to your process, not price.
