Currencies

Signs that the median voter is moving to the left are everywhere. Markets will cheer the move as it means more government spending. In the long term, it depends if policymakers stop at fiscal stimulus. In this <i>Monthly Report</i>, BCA's <i>Geopolitical Strategy</i> reviews prospects for "Bremorse," latest in the U.S. election, Italian political crisis, tensions in South China Sea, and the long-term future of Europe.

The choppy bottoming process in the Chinese economy will likely continue in the coming quarters. Second quarter GDP numbers to be released later this week will likely indicate that the economic downtrend has halted. Our model is currently predicting a pickup in Chinese growth for the first time since 2013.

The breakout in the S&P 500 could boost flows to EM, and momentum could overwhelm fundamentals for several weeks. Nevertheless, U.S. interest rate expectations will rise and it, along with weak EM profits, will cap upside in EM risk assets. Take profits on our short EM stocks/long 30-year U.S. Treasurys position. Reduce short exposure to EM currencies by closing the currency trades where the long side is partially against the yen.

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.

Brexit is putting our bearish short-term dollar view in question as global policy uncertainty has surged. Yet, investors are displaying elevated signs of risk aversion but the global economy still looks fine. This dissonance is likely to end with investors increasing risk taking, a bearish development for the counter-cyclical dollar. Favor commodity currencies over European ones.

A number of divergences have emerged in global financial markets. These gaps are unsustainable. The recent improvement in Asian trade/manufacturing has been largely due to firming demand for electronics/semiconductors. Meanwhile, demand/output for industrial goods and basic materials - the areas leveraged to Chinese capital spending - remain weak. Fixed-income traders should bet on yield curve steepening in India: receive 1-year/pay 10-year swap rates.

Yield and Protector Portfolios should continue to benefit in current environment. Equities face seasonal headwinds.

For the month of June, the model performed in line with both global equities and the S&P 500. For the month of July, the model is increasing its risk exposure.

Global uncertainty is elevated, but markets know this. Brexit could prove extremely negative for the global economy if it prompts a questioning of the EU's integrity. The cyclical outlook for the pound remains poor, but a short-term opportunity to buy GBP/JPY has emerged. We still like the SEK and commodity currencies. The SNB will continue to intervene, but the peg is increasingly dangerous.

Post-Brexit uncertainty will continue for some time. But we were already cautiously positioned, and would not go any more defensive.