FICC

If the Fed convinces markets it is on track to lift rates this year and a couple of times next year, we expect a 10% appreciation of the USD over the next 12 months. This would be extremely bearish for commodities.

Given the rising odds of another Fed move before year-end, and the uncertainty that additional easing can be delivered in Europe and Japan, we re-iterate our tactical call to maintain a below-benchmark duration stance.

A Fed rate hike by December could erode the slowly evolving fundamentals favoring base metals.

We put the odds of a Fed rate hike this year at slightly better than 50/50. But in the event of a rate hike, any sell-off in risk assets will be relatively short-lived and not as severe as the sell-off that followed the initial rate increase last December.

Special Report

Xi Jinping has not overthrown China's consensual leadership model; The Communist Party is highly vulnerable to the emerging middle class; Factional struggles will re-emerge before the 2017 Party Congress; Economic structural reform is constrained by a host of factors; Geopolitical tail risks will remain elevated.

The evolution of oil demand will be far more important for prices than the outcome of next month's International Energy Forum meeting in Algiers. The supply destruction brought on by lower prices is increasingly shifting to OPEC producers outside the Persian Gulf, which keeps the odds of a large-scale unplanned outage - in Venezuela or Nigeria, in particular - elevated.

Special Report

Most scenarios point towards higher Japanese bond yields with valuations overstretched. Maintain a maximum underweight stance on Japan in global hedged bond portfolios.

Special Report

The 10-year Treasury yield's post-crisis pattern suggests that a monetary policy catalyst is required to spur a material increase of around +100bps or more. In this Special Report we do a survey of the major developed market central banks to assess whether any could possibly incite such a "bond tantrum" during the next six months.

U.S. inflationary forces remain tame, forcing the Fed to maintain an easy bias. Yet, the global economy is improving. This confluence could weigh on the dollar and boost commodity currencies. The NZD has more upside, but it will lag petro currencies. The BoJ will act, but timing is uncertain. Keep a negative bias toward the yen. CAD/NOK has more downside.

The deepening interconnectedness of the "global eco-system" brought front-and-center by NY Fed President Dudley will keep inflation at the consumer level synchronized in the world's largest economies. The importance of global variables in the evolution of local inflation rates will remain elevated.