Europe

Falling inflation will allow bond yields to decline in the major economies over the next few quarters. As such, we recommend that investors shift their duration stance from underweight to neutral over a 12 month-and-longer horizon and to overweight over a 6-month horizon. Structurally, however, a depletion of the global savings glut could put upward pressure on yields.

Despite uncertainty and intrusive government policy, natural gas and oil markets have managed to direct much-needed supplies to Europe going into winter. Natgas markets attracted massive LNG inflows – at a cost of record-high prices – that now leave the continent’s on-land storage close to full. A floating LNG market now exists on Europe’s Atlantic Coast – made possible by spot prices at the Dutch Title Transfer Facility trading ~ 40% below 1Q23 futures. The TTF futures contango market structure allows unsold cargoes to be stored on vessels off the coast of Europe until needed this winter via hedging (e.g., buy spot, sell 2- to 3-month-forward futures to lock in storage costs). This expands storage for the continent, leaving the EU in much better shape to weather the loss of Russian pipeline gas.

In Section I, we note that while recent inflation developments point to some supply-side and pandemic-related disinflation, they also point to potentially stickier inflation over the coming several months. The inflation, monetary policy, and geopolitical outlook remains sufficiently risky that an overweight stance towards equities within a global multi-asset portfolio is not justified, and we continue to recommend a neutral stance for now. This month’s Section II is a guest piece written by Martin Barnes. Martin, who retired from BCA Research as Chief Economist last year after a long and illustrious career, discusses the outlook for government debt and the possibility of an eventual crisis.

It takes time for wage inflation to die. So, if 2022 was the year that central banks’ monster tightening killed bond and stock market valuations, then 2023 will be the year that it finally reaches the economy and kills profits, jobs, and the wage inflation that has so far refused to die. This means that commodity prices have substantial further downside, while healthcare relative performance has substantial further upside.

Is the US in a wage-price inflation spiral that could lead to more aggressive Fed rate hikes? Is it time to buy UK Gilts after a wild month of volatility? We answer "no" to both questions, as we discuss in this week’s report.