Fixed Income
To cheaply hedge against a "Leave" vote, go long U.K. inflation protection, reduce exposure to U.K. corporate debt, and position for a steepening of the Gilt curve.
We continue to view the rally in equities and high-yield corporate bonds since February as a high-risk affair.
We discuss the technical and political problems with helicopter money, plus the near-term outlook for the euro area economy and markets.
Colombia's structural growth outlook is superior to many other developing economies. In the near-term, however, Colombia's economy is set to weaken materially. Upgrade Colombian equities and sovereign credit to neutral versus EM benchmarks. Continue betting on further yield curve flattening/inversion and buy 10-year domestic bonds on weakness. Go long Colombian bank stocks / short Peruvian banks, and stay short the peso.
The factors that drove the recent rally - Fed dovishness, China reflation, and a pickup in economic data - are largely over.
Financial conditions will continue to ease during the next few months, and the Fed will use its June statement to prepare the markets for a rate hike in September.
Absolute valuations on Euro Area corporates are not cheap, but there are relative value opportunities to take advantage of the ECB becoming a major buyer of corporates. Favor Euro Area High-Yield over Euro Area Investment Grade, and favor Euro Area corporates over U.S. corporates.
Profits are bottoming but the outlook is lackluster, even if further dollar weakness provides a temporary boost.
For the month of April, the model's performance was in line with the S&P 500, but lagged global equities. For May, the model is aggressively paring back its equity risk exposure. Both Europe and Emerging Markets were downgraded, but still possess the lion's share of the equity allocation, while defensive markets such as the U.S. and Switzerland received a boost. In the fixed-income space, U.S., Italian and Spanish paper were the model's favorites.
Our sense is that the current reflation trade will extend into the summer, sending stock and commodity prices higher and the U.S. dollar down. Global government bond yields should rise during this phase. Beyond the near term, we expect these reflation trades to go into reverse. Stay defensive.