Monetary

Policy easing works with a time lag, and the previous easing measures should continue to feed through to business activity. The recent decline in the trade-weighted RMB should lead to continued improvement in the industrial sector's performance for at least the next two quarters.

The near-term (next month or two) market dynamics in EM risk assets remain a coin toss. Beyond that the outlook for EM risk assets remains downbeat. EM financial markets are complacent and there are many potential negative EM/China developments that could derail the current EM rally. A new trade: go long the KOSPI / short EM overall equity index.

Most financial assets are trading within the confines of the feedback loop between markets and Fed policy. Investors should avoid expensive assets such as spread product, and hold positions with attractive long-term value such as U.S. TIPS over nominal Treasuries and U.S. Treasuries over German bunds.

Most financial assets are trading within the confines of the feedback loop between markets and Fed policy. Investors should avoid expensive assets such as spread product, and hold positions with attractive long-term value such as U.S. TIPS over nominal Treasuries and U.S. Treasuries over German bunds.

The dollar countertrend move has more downside, but beyond the next few months, the dollar remains in a cyclical bull market. Improvements in global growth, even if temporary, are likely to lift non-U.S. rates more than U.S. ones. The euro will benefit from that move as investors still have deep negative feelings toward EUR/USD, exactly as economic momentum has moved in favor of Europe. The SEK should outperform.

The reflation trade will continue for a few more months on Chinese fiscal/monetary stimulus and a more dovish Fed. Despite a slightly better-than-expected start to the earnings season, Q1 S&P 500 profits are set to fall for a fourth consecutive yoy decline. Ex-energy, things aren't so bleak. Domestically-focused companies will experience flat earnings and modestly-positive revenue growth in Q1. Although margins have almost certainly peaked, their decline will be drawn-out. Remain overweight Europe/Japan/China versus the S&P 500 (currency-hedged).

The euro area's nominal GDP and wage bill are growing at 3%, suggesting that fears of deflation are overdone. But a higher wage bill has implications for profits growth.

Japanese policymakers are in the process of shifting away from negative rates and fiscal consolidation, leaving JGB yields exposed to any move to weaken the yen that could raise depressed inflation expectations.