GeoMacro | Cyclical Trends

If President Milei does not ease policy immediately to contain the disinflationary squeeze, he is likely to lose next year's election. This means neoliberal structural reforms will suffer a setback in subsequent years. Close long positions in Argentine assets.

Democrats will win both houses in the midterm, but beyond near-term volatility, none of the outcomes pose a major market risk. The vote is more important as a signal of an anti-business turn in US policy in coming years, which markets could start to price in late 2027 or early 2028.

The big risk for the markets remains a flare up in the Middle East conflict. The Fed appears to be targeting geopolitics as much as inflation fundamentals. By the logic of transitive properties, therefore, more war means more hikes. That’s negative. So why are we not bearish on equities and bonds? Because President Trump holds his own faith in his hands. With his unfavourability near all-time highs (Chart of the Month), the conflict in Iran is at its end. Our worry? A Democratic Party sweep that surprises in its intensity and thus forces markets to start pricing in a leftward tilt in 2028.

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.

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.

The world has descended into a full blown Doomer panic since the 27-year-old Anthropic engineer quit over the threat that AI would cause human extinction. Now-famous Jacob Coxon posted that “The people building AI earnestly believe that it could kill us all by the end of the decade. This is not a marketing stunt.”

President Trump is raising tariffs again, now through 2027 – and more countries will retaliate this time. While markets can climb over “Liberation Day 2.0,” investors should be wary of today's aggressive policies engendering drastic policy change in 2028.

There is no evidence that there is a run on US government bonds. All the data at our disposal, and the curated views of our bond specialists, suggest that the US bond market may have 99 problems, but a coordinated run on its safe haven status is not one.