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  • Is the mini-correction in markets a foretaste of something bigger, or does the still-strong real economy give risk assets scope to bounce back?
  • Should investors be rotating out of equities and into bonds, or are the latter still vulnerable to buyers' strikes against a backdrop of fiscal indiscipline?
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  • It's not just a stronger economy
  • Nor even those long and variable lags
  • It's that markets are being driven by money flows and not rate levels
  • It is often said that QE held down bond yields, meaning QT should be a major contributor to this year's rise
  • But the evidence for this is deeply questionable
  • QE does indeed hold down real yields, through a portfolio balance effect
  • But it also pushes up inflation breakevens via signalling
  • What is missing so far from this round of QT is the historical fall in breakevens
  • The true driver of higher bond yields lies with inflation, not QT
  • CB liquidity still a better explanation of risk asset performance than many fundamentals
  • H1 liquidity injections now fading
  • Market performance - despite some prior 'excess' - largely fading in line
  • Prospects mostly negative but depend on RRP, BoJ and explanation for the prior 'excess'
  • Net capital outflows from China have accelerated sharply in recent months
  • They are now running at a near-2015 rate
  • The only real source of 'inflows' is a drop in prior foreign lending by domestic banks as they divert capital onshore - but even this can be interpreted as a sign of vulnerability

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