Global

The tailwind of better-than-expected global growth and highly supportive monetary policy has the potential to push global spread product into overshoot territory.

The combination of strengthening global growth and more accommodative monetary policy means that spread product can continue to outperform in the coming months. Despite lingering concerns about credit quality in the corporate sector, we recommend moderately increasing exposure to high-quality spread product.

A two-speed economy requires selective portfolio construction, favoring consumer-oriented and mainly non-cyclical industries. Put communications equipment on the high-conviction overweight list, and stay clear of refiners.

This week's <i>Special Report</i> written by <i>Geopolitical Strategy's</i> Managing Editor Marko Papic discusses the "bull market" in terrorism and the limited impact on risk assets from terrorist attacks. The rise in attacks will not necessarily lead to anti-establishment politicians taking power.

With the Fed more sensitive to how its policy affects the global economy, and <i>vice versa</i>, we believe monetary policy will remain accommodative to encourage U.S. and EM growth.

Government bond markets have likely overestimated the degree of policy dovishness that is likely to be delivered by the major central banks in the next few months.

The odds of an inflation "mini-scare" are rising, although deflationary tail risks from abroad cannot be dismissed.

It is dangerous to equate recent equity strength with economic vitality, as history shows that liquidity-fueled equity advances favor non-cyclicals over deep cyclicals. Take profits in gold, buy rails and sell industrial machinery.

In July, the model outperformed both global equities and the S&P 500 in local-currency terms, while underperforming in U.S. dollar terms. For the monthly of August, the model made no changes to overall risk exposure.

The U.S. and the global economies are improving. A synchronized upswing normally trumps the Fed in determining the path for the dollar. U.S. inflation expectations are likely to rise relative to the rest of the world, weighing on the dollar. The risks for EUR/USD have risen. We are hedging our long EUR/USD position by shorting the euro on some crosses. Buy CHF/JPY.