Commodities & Energy Sector

The euro stopped weakening in March 2015, which coincided with the ECB starting its asset purchases. Since then, the ECB's incremental policies have been unable to push the euro lower. The price action speaks to the resilience of the currency and indicates that a lot of bad news has been discounted.

The wide WTI - Brent differentials at the front of these respective curves will continue to incentivize crude-oil exports from the U.S. to European refiners, who tend to favor the light-sweet crude coming out of LTO plays.

Expectations of a deepening EM/China growth slump and RMB depreciation have been the key to the selloff in global risk assets. There is no basis for these expectations to improve. Therefore, there are few fundamental reasons for EM and global risk assets to rally much further. Stay put. In Brazil, the impeachment rally is unsustainable and will reverse sooner than later. Stay short Brazilian risk assets.

Gold and gold stocks have bounced nicely in recent weeks. But from a multiyear perspective, both remain extremely depressed (top panel). While gold has had several false starts in recent years, a number of factors suggest that the latest rally will have durability. Gold raises in stature as policymakers lose efficacy. That is certainly the case now, as incremental QE has done little to foster a return to above-trend growth and a growing number of countries have resorted to negative deposit rates to reinvigorate anemic economic activity. Real interest rates, the opportunity cost of holding gold, which is a zero-yielding asset, are low and falling around the world and may need to fall further to reverse the decline in economic confidence. Importantly, gold has begun to rise in a number of currencies, suggesting that it is no longer just a play on a lower U.S. dollar. From a tactical perspective, sentiment toward the yellow metal is still pessimistic, despite the jump in gold prices in recent weeks. That is a contrary positive. As a result, we recommend an overweight position in gold equities, both as portfolio protection and also as a long-term hedge on monetary policy exhaustion. While the S&P 1500 gold index has only two stocks, the Global Gold Miners ETF (GDX) provides a liquid and diversified proxy for gold equities, which we will use to track gold stock performance. Please see yesterday's Weekly Report for more details. bca.uses_in_2016_03_08_002_c1 bca.uses_in_2016_03_08_002_c1

As confidence in the sustainability of corporate sector profitability declines, the multiple accorded to equities should recede. Ten reasons to stay underweight the tech sector. Initiate an overweight position in gold shares.

The relief rally is not over, and could benefit from commodity and currency market movements. Oil prices likely are banging out a bottom. In general, however, a healthy dose of caution is warranted. Our bias is to sell into, rather than chase, rallies in risk assets.

Near-term, global yields will remain depressed, but the structural forces suppressing yields should abate and even reverse in the long-run. Slower potential GDP growth - and lower commodity prices - will eventually shift from tailwind to headwind for bonds. Stepped-up efforts to increase inflation will boost long-term nominal yields; populist politics and calls to curb income inequality will amplify this trend. Long-term investors should stay neutral global bonds for now, but prepare to shift to a structural underweight beyond this decade.

A stunning 9.9 million-barrel build in U.S. oil inventories this week failed to arrest the upward climb in prices.

The recent rebound is not a harbinger of a prolonged recovery in risk assets. The many potential negatives will keep volatility high and trigger further occasional selloffs.

For the month of February, the model underperformed both global and U.S. equities. For March, the model has modestly pared back its equity risk exposure, shifting the allocation into bonds. While Europe remains the largest equity overweight, EM and Canada also received some allocation. The U.S. and New Zealand were slightly downgraded. In the fixed-income space, the model is sticking with Italy and Spain.