Latest from BCA Research
We review our Model Bond Portfolio performance for Q3 and look ahead as energy prices continue to drive fixed income markets. Balanced labor markets point to a mild tightening cycle, creating opportunities in government bonds and credit, while inflation-linked bonds continue offering protection against persistent energy risks.
We keep the Global Geopolitical Risk Score at 8 because there are still no ceasefires in Europe or the Middle East. Russia is provoking NATO, which will need to push back. Iran, emboldened by the lack of definitive US success, pushes its luck, which could invite a destructive response from the US. The Chinese economy remains fragile, increasing the likelihood of foreign belligerence. After the US midterm, President Trump faces fewer political constraints, allowing him to pursue a maximalist foreign policy to cement his legacy during his lame-duck period.
The global bond selloff is not over, but opportunities are emerging. US Treasuries and French OATs remain vulnerable to further selling, while other European government bonds look increasingly attractive. Investors should favor German Bunds and peripheral bonds, particularly on a currency-hedged basis.
The Irkutsk plague scare is not yet a crisis, but if it becomes one, Russia is a bad place for it to happen.
Our G10 FX cyclical scorecard still favors high-carry currencies over low yielders, suggesting patience should continue to pay. We break down the factors driving each currency and highlight the most appealing relative-value opportunities.
Long-dated bond yields rose another 48 bps since our last missive, quite a move in just a month. And yet, equities have remained resilient. This suggests that the move in bond yields is due to sanguine economic forces, not fiscal profligacy or inflation fears. In addition, the war in Iran is subsiding, partly because the Fed itself has conspired against it. Will President Trump restart the conflict regardless? Perhaps, however, the constraints are mounting against the White House foreign policy. We remain bullish on equities and reaffirm our view that investors with a long-term horizon should be nibbling at the current level of yields. To make sure that our bearish clients are happy, we pivot to the risk of higher tax rates in the US. Specifically, we try to answer the question of when markets price higher tax rates.
The most bullish development for Brazil from the weekend’s elections was not the higher odds of a right-wing presidency, but the likely president’s (Flávio Bolsonaro) stronghold in Congress. Upgrade Brazilian fixed-income markets to overweight and equities to neutral within their respective EM portfolios.
A narrow, tech-led rally left USHQ trailing its benchmark despite positive returns to the BCA Score. USHQ SMID lagged more modestly, with lower risk.
Forced selling may be approaching a pause, but France’s fiscal and political adjustment has barely begun. Maintain an underweight in OATs and use relief rallies to reduce exposure. Contained contagion is reassuring for Europe; it is not a buy signal for France.