Developed Countries

Overweight Our early-May upgrade of the S&P agricultural chemical index proved timely, as Bayer launched a bid for Monsanto, sending the index up sharply. It is tempting to book gains, but if underlying profit drivers continue to move in a bullish direction, share prices should have further to go before extreme bearishness will normalize. Raw food prices continue to grind higher, and are likely to receive an assist from a weaker U.S. dollar now that the market is pushing out the imminence of future Fed rate hikes. The world grain stock-to-use ratio is still well below average, despite soft demand in recent years, and could fall further given the production decline. That is supportive of food prices, and should help farm incomes stabilize and boost credit availability. As shown in the May 9th Weekly Report, farm cash rents were already off their lows, a positive sign for underlying property valuations and a critical factor determining capital availability. It wouldn't take much of an increase in fertilizer demand to overcome depressed relative forward earnings expectations. We recommend staying overweight, despite the 12% gains that have accrued in such a short time span. The ticker symbols for the stocks in this index are: BLBG: S5FERT - MON, MOS, CF, FMC.

Special Report

The median voter theory is one of the few genuine theories of political science. It assumes that voters have limited policy priorities and that politicians want power. Therefore the latter will adjust their stances to satisfy the largest swath of voters. The median voter in the Anglo-Saxon world is shifting to the left, and regardless of what happens in the Brexit referendum or the U.S. election, this shift will be the most consequential development for markets.

The median voter theory is one of the few genuine theories of political science. It assumes that voters have limited policy priorities and that politicians want power. Therefore the latter will adjust their stances to satisfy the largest swath of voters. The median voter in the Anglo-Saxon world is shifting to the left, and regardless of what happens in the Brexit referendum or the U.S. election, this shift will be the most consequential development for markets.

Special Report

Abenomics has disappointed, but not failed. The Bank of Japan could move to debt monetization next year, which would be positive for Japanese equities and negative for the yen.

The RMB has been steadily depreciating versus the U.S. dollar and has dropped to a new cyclical low versus its trade-weighted basket. All the while, Chinese domestic interest rates have lately drifted higher. When global investors wake up to these dynamics, global share prices and EM risk assets will likely sell off anew. In Mexico, initiate a new yield curve trade: receive 10-year / pay 1-year swap rates.

Special Report

In this <i>Special Report</i>, we revisit our list of signpost economic indicators introduced two years ago to identify if the U.S. and Euro Area were falling into a "Secular Stagnation".

Since downshifting from favoring growth over value to a neutral style bias at the beginning of this year, the growth/value (G/V) ratio has corrected sharply. While this recommendation shift was timely, at issue is whether a major cyclical trend change is underway, or if a resumption of the advance lies ahead, and/or another style switch is appropriate. Before making any decisions, it is critical to understand the driving forces behind the last few months' price action. Growth indexes have a hefty non-cyclical element compared with value benchmarks. In addition, growth is tech-heavy while value is dominated by financials. Thus, the rebound in cyclical sectors alongside the gentle depreciation in the U.S. dollar and oil price recovery provided a good reason for value-oriented stocks to rebound. However, that rally has not been accompanied by any real improvement in the global business cycle. Now that U.S. employment is starting to soften, concerns about the health of the expansion may broaden. Growth indices have a strong track record of outperformance when economic expectations are weak, as proxied by declining global government bond yields (shown inverted, top panel). The surge in the S&P dividend aristocrats index is also consistent with a safety bid rather than a return to 'risk on'. For these and other reasons outlined in yesterday's Weekly Report, we recommend returning to a growth vs. value bias.

While we continue to maintain a defensive over cyclical portfolio structure, yesterday's Weekly Report identified a number of catalysts that could eventually change our view: broad-based and sustained U.S. dollar weakness, particularly against a basket of EM currencies in countries with large current account deficits would, the Chinese manufacturing sector stops deflating, global PMIs firm, global export volumes and prices top contracting, an end to U.S. over global profit dominance and/or inflation expectations turn higher around the world. So far, these potential catalysts have only shown signs of stabilization rather than strength, underscoring that it is premature to position for a recovery in cyclical sector profits. Stay defensive, and please see yesterday's Weekly Report for more details.

Last week's soft employment report reinforced our defensive vs. cyclical portfolio bias, as firms appear to be slowing hiring in response to the broad-based profit squeeze. That is a plus for non-cyclical sectors, as defensive sector profits have steadily outperformed in the last two years, supporting share price outperformance. The opposite is true for cyclical sectors, notwithstanding the bounce earlier this year. At some point, the tide will turn in favor of cyclical sectors, but a number of factors argue against making such a leap of faith at the moment, please see the next Insight.

Assuming last month's weak employment report is not the start of a trend, the market is still discounting too low a probability that the Fed will lift rates this year. This means the Treasury curve should bear-flatten in the coming months, providing an opportunity to move to above-benchmark duration.