Economy

European inflation has further downside and core CPI will soon begin to fall too. However, European growth will remain soggy in Q2. What does this environment mean for investors?

In this week’s review, we look at recent data and its impact on currency markets.

Is there a lot of cash on the sidelines ready to be deployed? Would the US recession not be bearish for the US dollar and help EM like it did in the early 2000s? Why can the US investment playbook of the past 15-25 years not be used in this cycle?

Tight monetary policy will suppress copper capex. Loose fiscal policy, which is lavishing stimulus on energy and defense firms, will stoke copper demand. Constrained copper supply and turbo-charged demand will feed into headline inflation. If the CCP adopts large-scale monetary stimulus to break its liquidity trap, inflation pressures will rise. This global policy mix will bolster oil and gas demand well beyond the 2050 target for net-zero emissions, given the long lead times to bring new copper supply online. We remain long the XOP and XME ETFs, and the COMT ETF to retain exposure to tightening supplies and rising demand for copper and oil.

Eventually South Africa will do its macro rebalancing the least painful way: via adjustments in nominal variables such as prices and currency, rather than in real variables such as jobs and incomes. That entails a much weaker rand in future.

When complexity collapses, it is a red flag for impending tail-events, heart attacks, and reversals in the markets. We describe how to measure complexity, how to spot the red flag that it has collapsed, and list some investments that are approaching potential turning-points.

Bullish equity sentiment may persist in the second quarter on the Fed’s pause, but tight monetary policy, financial instability, elevated recession odds, extreme US polarization and policy uncertainty, and still-high geopolitical risk should encourage investors to maintain a defensive position for the coming 12 months.