Correlations

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.

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.

Using long-term real rates, Uncovered Interest Rate Parity still works for exchange rate determination. Currencies are also affected by the global risk appetite and commodity prices. Intermediate-term fundamentals for EUR/USD are pointing up, but the timing is not optimal to buy it yet. However, the long-term outlook for the euro remains poor. Currently, USD/JPY has room to rally in the short term. Long-term factors will also continue to weigh on the yen.

Yield and Protector Portfolios should continue to benefit in current environment. Equities face seasonal headwinds.

This <i>Special Report</i> looks at global equity valuations. The conclusion is that although most equity markets are far from cheap, some compelling investment opportunities do exist.

Even if commodity markets are not yet pricing a higher probability of fiscal stimulus following the U.K.'s Brexit vote, we believe they will begin doing so in very short order.

If the damage of the Brexit is contained in the U.K., the direct economic impact on China should be marginal. China's relatively closed financial system makes it less exposed to global shocks than most other countries. It is too soon to expect a policy response from the Chinese authorities just yet, but Brexit has pushed China's "balancing act" needle further toward stimulus.

Equity and Treasury market positioning support the notion of a bounce in risk assets, possibly egged on by dollar weakness.

EM/China oil demand is not as strong as some reputable energy sources have indicated. As and when the oil market shifts its attention from supply cutbacks to subdued EM/China oil demand, oil prices will relapse. Renewed drop in commodities prices and poor growth in EM will weigh on EM risk assets going forward.

Increasing uncertainty over the Brexit vote will keep the Fed from raising its overnight policy rate at this week's FOMC meeting, but it may not keep the USD from rallying in the event of a decisive win for Brexit advocates on June 23.