Commodities & Energy Sector

The 35-year bond bull market is coming to an end and the downward sloping trend channel for yields is changing to flat. Asset allocators should trim duration and fixed income exposure.

The ongoing stampede into EM bonds is unsustainable. Running away from G7 bonds does not necessarily entail buying EM bonds. These are two separate investment decisions. Lower commodities prices, weaker EM currencies and higher G7 bond yields will undermine EM bond returns going forward. A new relative bond trade: long Polish and Hungarian 5-year / short South African and Turkish 5-year local bonds, currency unhedged.

Refiners will reduce run rates over the next month or so to clear unintended inventory accumulation, but it's not like they've never had to deal with this situation.

In successful investment analysis "less is more, and usually much more effective."

Forecast is diverging from strategy for equities. Intermediate-term positives allow for a blowoff to the upside. But we do not expect the rally to have staying power over a 6-12 month horizon.

Commodity speculation provides liquidity to hedgers, allows price discovery, and offers access to an asset class that typically produces returns that are not correlated with stock or bond returns.

Today, on a tactical basis, we are moving our allocation on EM hard currency bonds to neutral from underweight. In this <i>Special Report</i>, we elaborate on the reasons leading to this decision.

Our <i>Cyclical Indicator Update</i> reveals that a defensive portfolio strategy remains the best bet to navigate the crosscurrents of stagnant profit/economic growth yet abundant global liquidity.

The blowout June nonfarm payrolls report reflects a tightening labor market, consistent with stronger ISM manufacturing and non-manufacturing readings. This will take time to impact Fed policy.

Please see attached our <i>Third Quarter Strategy Outlook<i/> which discusses the major investment themes and views we see playing out for the rest of the year.