Financial Markets

As the U.S. median voter is shifting to the left, redistributive policy could come into play. A strong dollar helps to achieve this goal as it results in a bigger share of labor income in the economy. EM and commodity currencies could bear the brunt of the pain. Favor the euro on its crosses. Stay short CAD/NOK, but tighten stops.

Our <i>Fourth Quarter Strategy Outlook</i> presents the major investment themes and views we see playing out for the rest of the year and beyond.

Contrary to the almost universal bearish market consensus, we are raising our tactical view on iron ore to bullish from neutral. We remain tactically neutral on the steel market over the next three months. Strategically, we are bearish iron ore and steel.

This week, we are reviewing all of our active trades discussed in the last twelve months, which are intended to be an overlay to our recommended fixed income portfolio.

There are two key risks that could derail a bear-flattening of the yield curve. The first is a Trump election victory, the second is a flaring of stress in the non-U.S. banking sector.

Since 2014, market expectations of the Fed funds rate has been the primary driver of banks stock performance. Investors' heightened focus about the positive role of interest rate hikes on bank profitability has some merit because when interest rates are near the zero lower bound, net interest margins are unduly suppressed. However, a breakout in bank stocks requires much more than a hawkish Fed outlook: without a significant pick-up in top-line growth, there is no impetus for bank stocks to sustain rallies.

The DM Country Model favors the U.S., with Japan and U.K. being the two large underweights. The Sector Model continues to recommend a cyclical tilt.

In a February <i>Special Report</i> titled "Assessing Fair Value In FX Markets" we introduced a set of long-term valuation models based on various fundamentals. We have updated the results and added KRW, INR, PHP, HKD, CLP and COP to our analysis. The dollar still remains expensive, albeit with no signs of a dangerous overvaluation. The yuan is now at its cheapest level since 2009.

In September, the model outperformed the S&P 500, while it underperformed global equities in both USD and local-currency terms. For October, the model trimmed its allocation to stocks and boosted its weightings in bonds and cash.

This week's <i>Special Report</i> looks at the three controversial predictions that I made at this year's <i>BCA New York Investment Conference</i>.