Economic Growth
The Turkish central bank has almost exhausted its foreign exchange reserve. It has been printing money to keep interest rates lower, and sustain the credit boom in the economy. Such policies are unsustainable and the currency will plunge anew. Currency depreciation will push up market-based interest rates. Stay short/underweight Turkish risk assets. A new trade: Short 2-year local currency government bonds.
The window for "stealth" RMB depreciation is likely closed for now. The Chinese authorities are stepping up efforts to boost infrastructure construction with several major announcements last month. Capital spending on transportation infrastructure will likely accelerate at least through next year.
A Fed rate hike in June, July or September is likely to send our 12-month fed funds discounter toward 70bps by the date of the next hike. This re-rating of rate expectations will cause significant flattening at the long-end of the curve. Investors should enter a 5/30 flattener to profit.
There is a risk that global bond yields move higher in the near term, although we prefer to position for that move <i>via</i> cross-market spread, yield curve and inflation trades.
Markets will remain stuck in a trading range, driven by two policy feedback loops: the Fed's and China's.
This month's <i>Special Report</i> reviews the literature on equity market timing, and identifies the key indicators that historically have had the best track record. We then aggregate the indicators into an overall scorecard that should prove to be valuable for investors in these volatile times.
Stronger GDP growth will permit the Fed to hike rates once more before year-end, no earlier than September. However, the feedback loop between the Fed and financial conditions will prevent a second rate hike this year.
The Chinese corporate sector has been reluctant to expand, focusing instead on destocking inventory and hoarding cash. This protects the corporate sector balance sheet, but is not conducive for strong GDP expansion. Q1 earnings reports confirm that an upturn in the Chinese profit cycle is unfolding.
The U.S. dollar has fallen to almost 5% below its 2016 peak. In this <i>Special Report</i> we explore the impact of a weaker dollar on key U.S. fixed income markets.