CoreMacro

We think the banking turmoil set off by Silicon Valley Bank’s failure will prove to be less than it’s been cracked up to be and that it will not derail the near-term equity we expect.

Is the European banking system hiding nasty surprises? How will the recent stress affect European growth and the ECB’s policy outlook?

In this Strategy Outlook, we present the major investment themes and views we see playing out for the rest of 2023 and beyond.

It is a big mistake to think that rate cuts or lower bond yields will ease credit conditions. Quite the contrary. After an aggressive tightening of monetary policy, the first rate cuts always coincide with much tighter credit conditions. We discuss the implications for credit, government bonds and equities. Plus, we find a startling anomaly in equity sector performance.

Chinese onshore stocks are attractive on a risk-reward basis relative to their global counterparts. If the global equity bear market continues, our bias is that Chinese onshore stock prices will also drop, but they will likely fall by less than their global peers.

It is too early to know whether the drop in bond yields will offset the drag on growth from tighter lending standards. But if it does, the net effect on equity valuations could be positive. This is enough to justify a modest tactical overweight to equities, with the proviso that investors should look to reduce equity exposure later this year in advance of a mild recession in 2024.

Have global equity markets reached a riot point? Is the Fed going on hold a sufficient condition for stocks to stage a cyclical rally? If not, what would be needed to produce such a rally? Does the Fed’s recent balance sheet expansion foreshadow a rise in the US money supply? This report provides answers to all these questions.

Special Report

Both iron ore and steel will have oversupplied markets in 2023. The path of least resistance for iron ore and steel prices will be down in the coming months. We expect both iron ore and steel prices to drop by 15%-20% from their current levels. We recommend that investors short stocks for global steelmakers and global mining companies.

Special Report

The Russia-Ukraine war has prompted Europe to ramp up its defense spending. This will greatly benefit its defense industry, especially if defense coordination across the EU increases.

The banking crisis has hit European shores and engulfed CS; is this all bad news for Europe or have the odds of a policy mistake declined?