FICC

We expect oil inventories to resume drawing and EU sanctions on Russian oil imports to tighten markets. We remain bullish oil and continue to expect 4Q22 and 2023 Brent prices to average $100/bbl and $116/bbl, respectively. We remain long the XOP and COMT ETFs.

Special Report

In this Special Report, we consider what some common monetary policy rules are recommending for the major central banks and derive conclusions on duration strategy and country allocation for bond investors. We conclude that rate hike expectations in most countries may appear appropriate given the current global backdrop of high inflation and low unemployment, but look elevated on a forward-looking basis versus slowing global growth and peaking global inflation.

The narrative that the US can tolerate much higher interest rates, compared to the rest of the world has helped the dollar in 2022. In this report, we examine the sustainability of this thesis, from our holistic assessment of global growth indicators.

Our 4Q22 and 2023 Brent forecasts remain at $100/bbl and $116/bbl. Upside price risk continues to dominate oil markets. We remain long the XOP and COMT ETFs to retain exposure to oil and gas producers’ equities, and higher commodity prices and further backwardation, particularly in copper.

The messages from the deteriorating fundamental backdrop (tight monetary policy, slowing global growth) and improved credit valuation (elevated 12-month breakeven spreads) are giving conflicting signals on corporate bond strategy. We are putting more weight on the fundamentals and are staying with an overall underweight stance on global investment grade corporates, with a slight bias towards Europe given more attractive spread valuations. At the same time, we see selective opportunities in sectors where risk-adjusted spreads are wide as signaled by our individual country sector valuation models, like US Energy and euro area Financials.

In this report, we identify the Norwegian krone as a currency that could outperform especially at the crosses, irrespective of the broad dollar trend.

CBs proved to be savvy buyers of gold over 3Q22, scooping up record volumes of the metal as prices remained weak. The exorbitant privilege accorded the USD’s reserve-currency status will continue to erode as EM states move to insulate themselves against US financial and trade sanctions being turned on them. Based on our modeling, we believe as long as the Fed is intent on keeping the real effective USD exchange rate and real UST rates positive, demand for higher CB gold reserves will persist. Given this view, we are getting tactically long gold at tonight’s close.

Central banker messaging after the latest rate hike announcements in the US, UK and Australia indicates a shift in focus from the pace of hikes to how high rates must rise to slow growth and bring down inflation. This represents the next stage of the global tightening cycle, where rates will go higher in countries where neutral rates are higher, like the US, compared to countries with lower neutral rates like the UK and Australia.

This week we present our Portfolio Allocation Summary for November 2022.

In this report, we identify 5 key signposts that will mark a turn in the dollar. These include technical conditions, foreign real interest rates, US (and global) yield curves, Chinese economic conditions and geopolitics. We then assess whether it is time to short the dollar.