Gov Sovereigns/Treasurys
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.
Risks to global growth remain to the downside. Selling pressure in cyclical markets and assets will escalate. EM currencies will make new lows versus the U.S. dollar, the euro and yen. Take profits on our long JPY/short KRW and long JPY/short SGD trades. Short KRW versus an equal-weighted basket of the U.S. dollar, yen and euro. Continue underweighting Peruvian equities.
A June rate hike is a real possibility, but the Fed still needs evidence that growth is rebounding toward 2% in order to follow through. Whether the next rate hike occurs in June or later this year, a persistent hawkish shift from the Fed will send Treasury yields higher during the next few months.
This week, we present five of the more interesting yield curve trades in the Developed Markets for the latter half of 2016.
Tougher Fed talk warns that the Goldilocks combination of higher stock and bond prices in place since February is not sustainable.
Australia's equities and currency are driven largely by industrial commodities prices, Canada's by the oil price. Given our more positive view on oil, we prefer Canadian assets, though both markets face risk from stretched property prices and household debt.
There is a considerable dichotomy between the EM equity universe and EM corporate credit markets. EM credit markets remain mispriced. EM currencies are at risk of renewed depreciation. This will push sovereign and corporate spreads, as well as high-yielding domestic bond yields, higher. Continue underweighting Indonesian stocks, sovereign credit and domestic bonds within their respective benchmarks.
Within an overweight allocation to Euro Area corporates versus U.S. corporates, favor single-B rated Euro Area High-Yield and Euro Area Investment Grade sectors that offer higher duration-adjusted spreads.
The next rate hike is unlikely before September, despite the rebound in April retail sales. The dollar could suffer for a time, but the long-term bull market is intact.