Financial Markets

While the bearish bond trade currently has a lot of momentum, we continue to think that Treasury yields are close to a cyclical peak and will be lower on a 6-12 month horizon.

The next six-to-nine months hold a crucial test of whether the equity market will ratify the soft landing and the Biden administration or not. If so, then markets will rally on policy continuity and likely gridlock. If not, then markets will struggle until the election is over and again in 2025-26.

Commentators often use notions like debt deflation, balance sheet recession, and liquidity trap interchangeably. Yet, these are different concepts. This report develops a framework and provides a diagnosis of China’s economic malaise. A follow-up report will deal with what kind of treatment is needed for a recovery. As a trade, we recommend shorting the EM equity index.

High-Yield municipal bonds have performed well in recent years, but valuations are now stretched. We recommend an underweight allocation, though we prefer high-yield munis over high-yield corporate bonds.

Inspired by a client’s questions, we examine the rationale behind the implementation of the trailing stop governing our near-term asset allocation recommendations.

Outperformance of Growth sectors most likely has run its course. It is time to shift Growth vs. Value allocation to neutral, downgrade Semis, and upgrade Energy to overweight.