Policy

The ECB and the BoE provided a comforting signal to markets that the end of the respective tightening campaigns is coming before the summer. In the process, they are closing their hawkishness gap relative to the Fed.

Our bullish view on commodity prices is underpinned by demand growth driven by stronger real GDP, led by EM. Threats to this view – i.e., a failed re-opening in China, stronger USD, higher real rates in the US, and continued policy uncertainty – are non-trivial. All the same, we remain bullish industrial commodities and gold.

This US Bond Strategy Insight discusses what we learned from yesterday’s FOMC meeting and press conference, and discusses the implications of the market’s reaction.

The regulatory clampdown on Chinese platform companies is over. However, these companies have entered a new phase of active government control. Going forward, most platform companies’ strategic and business decisions will prioritize national interests, at the expense of shareholder interests. After the recent sharp outperformance, we suggest reducing the allocation to China's Investable Index from neutral to underweight within both global and EM equity portfolios.

President Biden’s political capital has fallen as he enters a challenging year that will include a domestic faceoff with the House Republicans and foreign crises stemming from China, Russia, and Iran. Stay defensive and prefer bonds over equities.

When does rising unemployment become a bigger problem than inflation? The Fed won't cut rates until that happens, probably thwarting market hopes of big cuts in 2H.

The most important question investors need to answer is whether this is the right time to shift the portfolio to a more aggressive and cyclical stance now that the end of the hiking cycle is in sight. To answer this question, we review the most recent macroeconomic, geopolitical, and equity market developments, and do our best to separate facts and data from sentiment and conjecture. We conclude that there are many challenges ahead and equities are not in a clear yet. We recommend investors add small positions in areas of the market that benefit from rate stabilization while maintaining an overall defensive stance.

This week’s Special Report goes over the structural problems facing the UK economy and our outlook for UK gilts and the sterling following turbulent moves in 2022.

This week’s Special Report uses our Golden Rule of Bond Investing to forecast US Treasury returns for 2023 under different economic scenarios.

Remain cautious and defensive overall. Stay long DM Europe over EM Europe. Look for EM opportunities in Southeast Asia and Latin America over Greater China.