CoreMacro

The new Labour government will have flexibility to respond to macro shocks, which is positive for the UK in general, namely GBP-EUR, and also gilts in absolute terms. But over the long run, tax hikes will likely surprise to the upside, which poses a risk to corporate earnings.

Does the incipient slowdown in European data herald a soft landing and a goldilocks period for equities? We have our doubts.

The PBoC appears increasingly uncomfortable with the rapid decline in the Chinese government bond yields. While the PBoC will succeed in temporarily curbing investors’ enthusiasm for bonds, the central bank will be unwilling to raise interest rates and unable to intervene in the bond market in any meaningful and lasting way.

We explain how to distinguish between ‘good’, ‘bad’ and ‘ugly’ unemployment, why bad unemployment is a much better gauge of the jobs market than headline unemployment, and what this means for the tactical positioning in bonds and stocks. Plus: base metals (XBM) have already sold off sharply, so take profits in the short position and open a tactical overweight in global materials (MXI).

Special Report

The green energy transition will drive a surge in copper demand over a long-term horizon. However, a better entry point to get long will emerge after the next economic downturn begins.

The Global Investment Strategy team downgraded global equities to underweight earlier this week. The latest reading from our MacroQuant model is consistent with this decision.

Special Report

The Labour Party’s comeback in the UK is widely expected and will lead to fiscal stimulus consisting of increased public spending with minimal tax hikes. But a sweeping single-party majority will reduce social unrest only at the cost of higher taxes over the medium term. The paradigm has shifted away from the Thatcherite low-tax regime of the now-discredited Tories. v

The consensus soft-landing narrative is wrong. The US will fall into a recession in late 2024 or early 2025. We were tactically bullish on stocks most of last year, turned neutral earlier this year, and are going underweight today. We conservatively expect the S&P 500 to drop to 3750 during the coming recession.

The end of China’s exponential credit growth will impede structural rallies in Chinese stocks and commodities, but US superstar stocks’ bubble-like valuations will impede them too. Leaving European stocks as the likely structural outperformer. Plus: copper is correcting, NVDA is consolidating.

The Indian election outcome is a positive development for the country’s long-term socio-economic outlook. Indian stocks, however, remain vulnerable in the near term due to sharply slowing nominal sales and surging real borrowing costs. Indian domestic bonds, on the other hand, are a buy.