Consumer

If the EM rally is sustained, the Fed will once again become resolute in its commitment to hiking interest rates. This in turn will spur another relapse in EM risk assets. Chinese policymakers are attempting to juggle contradictory objectives without a clear and realistic plan of action to resolve existing problems.

The Treasury market is now discounting too slow a pace of Fed tightening, while junk spreads are discounting too rapid an increase in the default rate. This week we examine the risk/reward proposition of temporarily leaning against some prevailing long-run macro trends.

This month's Special Report reviews the main factors driving the "lower for longer" bond yield view. A key finding is that the demographically-driven portion of the expansion in world capital spending has come to a virtual standstill, representing a major hit to underlying demand growth.

Markets see long-term global growth prospects as having deteriorated materially, with policymakers unwilling or unable to do much about it. Meanwhile, recent economic data - U.S. notably - hasn't been that bad. A divergence between what matters to Wall Street versus Main Street explains the disconnect. Accelerating wage growth, lower commodity prices, and cheaper rates are positives for households - but not for many Wall Street sectors. Stay neutral global equities. T-bonds are a "hold" for now. The dollar's selloff is overdone.

Greater safety for European taxpayers and bank depositors necessarily means more risk for bank equity and bond investors. We provide some detail, and also initiate two new short-term positions.

Value in the U.S. Treasury market is rapidly deteriorating, and the 10-year Treasury yield is now consistent with our fair value projections. Investors should shift from an above-benchmark to a benchmark duration stance.

Any recovery in risk assets and selloff in safe havens is unlikely to extend into the cyclical horizon.