Inflation/Deflation
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.
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.
The contours of a deal to solve Italy's banking problems are starting to emerge. This is good news for European risk assets. Nevertheless, reviving Italian growth will require even more ECB easing. The appetite for radical measures is low at present, but this will change if euro area growth remains lackluster and efforts by Japan to introduce helicopter money policies prove successful.
The recent rally in risk assets is walking a very fine line. If the Fed turns more hawkish, or U.S. growth slows, it could fall over.
The 35-year bond bull market is coming to an end and the downward sloping trend channel for yields is changing to flat. Asset allocators should trim duration and fixed income exposure.
This week, we are sending a <i>Special Report</i> written by BCA's Chief Global Strategist Peter Berezin, discussing the end of the 35-year global bond bull market. In addition, we are also sending you a joint <i>U.S. Bond Strategy/Global Fixed Income Strategy Weekly Report</i> which discusses the end of the secular bond bull market and the implications for global bond strategy.
This week, we are sending a <i>Special Report </i>written by BCA's Chief Global Strategist Peter Berezin, discussing the end of the 35-year global bond bull market.
Developed Market bond yields are too low relative to improving global growth and the strong recovery in risk assets post-Brexit. Reduce portfolio duration to below-benchmark.
Please see attached our <i>Third Quarter Strategy Outlook<i/> which discusses the major investment themes and views we see playing out for the rest of the year.