CoreMacro

Our high-frequency indicators show China’s growth momentum weakening further in September, increasing the likelihood of new stimulus in the weeks ahead. We remain tactically cautious on Chinese equities, but strategically constructive on offshore Chinese shares.

While it is not yet time to bet against risk assets, we push back on the increasingly popular ideas that the wealthiest households and/or AI-related capex can keep the expansion going despite the wobbling labor market.

One year in, the EU is progressing slowly in implementing Mario Draghi's recommendations to restore Europe’s competitiveness. The lack of progress is due more to the various pushbacks from European capitals and the lack of proper funding than a lack of ambition. Our overall assessment remains positive, given the EU is adopting many of the priorities from Draghi’s report.

US GDP growth appears to have accelerated even as employment growth has faltered. We will make a final decision in early October when we publish our next Strategy Outlook, but most likely, we will cut our 12-month US recession probability to 40%-to-50% from 60% and turn tactically neutral on stocks, while still retaining a modest equity underweight over a 12-month horizon.

Special Report

We test a wide range of strategies designed to capitalize on stock market anomalies. While most have waned over time, they generally remain profitable, especially for small caps. We will be using a mixture of these strategies for our new PowerTrades service.

The Fed’s actions tell us that it has chosen to avoid a recession at the cost of moving its inflation goalposts to 3 percent. Thus begins the slippery slope to price instability. Long-term investors should underweight the dollar, own some gold, but better than gold is bitcoin. Plus, a new tactical trade is short GOOGL vs. SPY.

Special Report

China’s policy-driven constraints prevent the “destruction” part of the creative destruction process. Instead, they entrench overcapacity, deflation, and poor profitability. We are reluctant to chase the rally in Chinese stocks in absolute terms.

Indonesia’s policy easing will boost domestic demand, but fuel inflation. Current account deficit will widen, and the rupiah will weaken. Stay short the rupiah and go underweight Indonesian stocks, domestic bonds, and sovereign credit in their respective EM portfolios.

Special Report

Structural tailwinds help explain tight credit spreads. In Europe, we see room for further tightening. Stay underweight US credit amid cyclical risks, but upgrade Euro Area IG to overweight and HY to neutral.

We are turning more constructive on Chinese internet stocks after several years of caution. We recommend going long offshore internet equities in absolute terms and upgrading MSCI China to overweight in a global equity portfolio.