Short-Term Gain, Longer-Term Pain?

Rather than signaling an extended period of tightening, China's latest policy rate hike is expected to be the last of its kind in 2011. In a similar vein, policy headwinds to growth are set to ease in AXJ and LatAm, setting up the stage nicely for a rebound in risk sentiment. Even though most of the policy normalisation is ahead of us in the CEEMEA region, the overall change in sentiment should help here as well. Slowing EM growth will take some of the wind out of the sails of inflation and base effects will kick in over the next 3-4 months to push headline inflation lower, in our view. A macro environment where policy isn't tightening further, inflation is on the decline and GDP growth is close to trend should be a potent combination for a recovery for risky assets. A final trigger for this change is the prospect for a better 2H in the US that our US team expects.