Developed Countries

We are confident that the reward/risk tradeoff to holding equities and high-yield corporate bonds is deteriorating and that rallies in these assets are high-risk affairs.

Special Report

In this piece, we present our general analytical framework, with a focus on long-term determinants. We go through various methodologies and relate those methods to our views and current FX market developments, concluding that the dollar bull market is not over, EM currencies have more structural downside, and that it will take herculean efforts from the BoJ to arrest the yen surge.

Special Report

The self-driving car, or Autonomous Vehicle (AV), will have a profound impact on a variety of industries. However, expectations for the timeframe of commercial AV availability are too optimistic. The greatest near-term impact is likely to be from advanced safety technologies developed on the path to full autonomy. In today's <i>Special Report</i>, we discuss our expectations for the timeframe of AV development, and the effect of advanced safety technologies on the Insurance, Health Care, Semiconductors, and Automotive industries.

Special Report

The self-driving car, or Autonomous Vehicle (AV), will have a profound impact on a variety of industries. However, expectations for the timeframe of commercial AV availability are too optimistic. The greatest near-term impact is likely to be from advanced safety technologies developed on the path to full autonomy. In today's <i>Special Report</i>, we discuss our expectations for the timeframe of AV development, and the effect of advanced safety technologies on the Insurance, Health Care, Semiconductors, and Automotive industries.

Risk assets will continue to edge higher over the next couple of months on improving economic data, notably from China. Longer term however, EMs - including China - are starting a prolonged deleveraging cycle, keeping commodities and cyclical stocks on the back foot. The dollar will likely follow the mirror image of commodities: down slightly the next two months, up substantially thereafter. A stronger dollar, in turn, will limit any rise in Treasury yields. Long-term investors should remain modestly overweight duration.

These general themes - along with our assessment that markets were overestimating downside price risk and underestimating upside risks arising from supply destruction and geopolitical instability - supported the best-performing strategic recommendations we made last quarter.

The previous Insight showed that capital formation has hit a brick wall as a consequence of ebbing risk tolerance. That is robbing the corporate sector of much needed growth capital, and will reinforce the need for retrenchment. As a result, the outlook for capital market profitability is bearish. To make matters worse, capital markets firms have been slow to downsize this cycle. Usually headcount is quick to react to slumping revenue, as a shrinking bonus pool necessitates fewer employees. However, capital markets employment growth has not yet started to contract, warning that revenue disappointment will be compounded on the bottom line. While net earnings revisions are negative, earnings are still expected to outpace those of the broad market in the coming twelve months, which is far too optimistic in the absence of resurgent economic confidence. We expect the S&P capital markets index to sink to new relative performance lows. Stay with a high-conviction underweight. The ticker symbols for the stocks in this index are: BLBG: S5CAPM - GS, BLK, BK, MS, SCHW, STT, TROW, AMP, BEN, NTRS, IVZ, AMG, ETFC, LM.

Last year's sharp tightening in financial conditions is wreaking havoc on the S&P capital markets index. Capital formation has dried up, and the persistent erosion in economic expectations, as measured by the total return ratio of stocks-to-bonds (S/B), warns of little chance for an imminent recovery. The chart shows that new stock issuance is probing the low end of the range, while M&A activity is cooling quickly. The S/B ratio provides a good indication of investor risk appetites, and the current message is that risk tolerance is ebbing. That will constrain the availability of capital, and dent fees for capital markets firms. Tack on historically low trading volumes, and profit prospects darken another notch. Against this backdrop, the only way to preserve profitability is through massive cost cutting, see the next Insight. The ticker symbols for the stocks in this index are: BLBG: S5CAPM - GS, BLK, BK, MS, SCHW, STT, TROW, AMP, BEN, NTRS, IVZ, AMG, ETFC, LM.

The ECB's intended purchases of corporate bonds will not sustainably lift the asset-class. But we have found a compelling long-term opportunity in the sovereign bond market, and a way to hedge Brexit risk.

Gold seems to be leading global share prices. Gold prices have rolled over since March 10. Hence, odds are that the U.S. dollar is about to bottom, and that global and EM stocks, as well as commodities prices, are about to relapse. We recommend two new trades in central Europe: Go long central European banks / short euro area banks and buy 10-year Polish domestic bonds.