Market Returns
There are two key risks that could derail a bear-flattening of the yield curve. The first is a Trump election victory, the second is a flaring of stress in the non-U.S. banking sector.
Since 2014, market expectations of the Fed funds rate has been the primary driver of banks stock performance. Investors' heightened focus about the positive role of interest rate hikes on bank profitability has some merit because when interest rates are near the zero lower bound, net interest margins are unduly suppressed. However, a breakout in bank stocks requires much more than a hawkish Fed outlook: without a significant pick-up in top-line growth, there is no impetus for bank stocks to sustain rallies.
In September, the model outperformed the S&P 500, while it underperformed global equities in both USD and local-currency terms. For October, the model trimmed its allocation to stocks and boosted its weightings in bonds and cash.
It's hard to make a case for attractive returns from any asset class over the next year. We dial down risk a bit but ending our overweight on junk bonds. Investors should pick up yield where they can but without taking excessive risk.
In this <i>Weekly Report</i>, we will discuss the outlook for BoJ and U.S. Federal Reserve policies after these meetings and the implications for bond markets in both countries.
Although the Fed is on track to hike rates in December, the credit cycle is far more advanced than the monetary tightening cycle. Position for a December rate hike by being short duration and in curve flatteners. Weakening corporate balance sheet fundamentals mean the long-term trend is for corporate spreads to widen.
Stocks are flirting with new highs, courtesy of a gradualist Fed and the reduced threat
of incremental near-term U.S. dollar strength.
A playable pair trade opportunity has emerged on the back of shifting capital spending patterns: long communications equipment/short machinery.
We put the odds of an oil-production freeze agreement between OPEC and Russian officials next week in Algiers at slightly better than a coin toss.
Are negative yields on $10 trillion of global bonds a sure sign of a bubble? The answer is no... and yes.