Money/Credit/Debt
Mounting evidence that the labor market is on its way to cracking checked two more boxes on our checklist, driving us to tactically downgrade equities to underweight while upgrading fixed income to overweight. Our tactical and cyclical (6-12 months) views are now aligned as our conviction that a recession will begin before year-end has increased.
Republicans are favored but the election is still competitive. Equities, corporate credit, and cyclical sectors will fall until policy uncertainty is reduced.
Investors hope that the ECB rate cuts priced into the curve will be sufficient to achieve a soft landing in Europe. History argues against this view, but will this time be different?
Oil markets will not be impacted by Venezuela in the near term, but by shocks from the Middle East. Maduro’s ability to stay in power in the short-term removes an avenue of oil supply relief. The same avenue is cut off if Trump is reelected. Geopolitical shocks in Venezuela could present tactical buying opportunities for Chile, Peru, and Colombia.
It’s status quo for the SIFI banks, as they don’t see consumer credit performance materially worsening from now-normalized levels and they are not meaningfully exposed to commercial real estate losses.
Investors should overweight US assets and de-risk their portfolios in anticipation of a major increase in policy uncertainty and geopolitical risk surrounding the US election and its global ramifications.
US dollar liquidity has been shrinking, which has important ramifications for global asset prices, including currencies. In this report, we delve into the process of dollar liquidity creation and the outlook for currencies over the next six-to-twelve months.
The failure of EM stock prices to rally over the past 13 years is rooted in their companies’ inability to grow their profits. Even though EM equities appear cheap based on their cyclically adjusted P/E ratio, there has been a regime change in EM corporate profitability. Therefore, the CAPE model should not be used to value EM stocks now.