Policy
The midterm election will bring some relief from US policy uncertainty. But this relief will be short-lived unless Republicans win the Senate, which is still too close to call. Global policy uncertainty and geopolitical risk will remain high.
Is a Plaza Accord 2.0 necessary? If so, why? If not, what could stem the rise in the dollar, or will it continue to overshoot? In our view, there are fundamental reasons not to bet on a new accord, but that does not necessarily help with investment strategy.
Monetary and energy policy errors will keep oil- and gas-price volatility elevated. This will continue to weaken capex in conventional and renewable energy. Headline inflation will remain elevated. We remain long the XOP ETF, to retain exposure to the equities of oil and gas producers, which will benefit from these policy errors.
Is the US in a wage-price inflation spiral that could lead to more aggressive Fed rate hikes? Is it time to buy UK Gilts after a wild month of volatility? We answer "no" to both questions, as we discuss in this week’s report.
Favor US and Southeast Asian stocks over global stocks. Stay underweight China, Hong Kong, and Taiwan.
The Fed’s tone has taken a decidedly dovish turn during the past week and, despite September’s hot CPI print, there is mounting evidence that a period of disinflation is coming. This makes the case for a pause in the Fed’s tightening cycle in Q1 or Q2 of next year.
BCA’s Emerging Markets Strategy team’s view remains that US inflation will prove to be sticky. That said, in this report, we examine under what conditions a considerable drop in US core inflation, whenever it transpires, would be bullish for stocks. Potentially significant US disinflation would be bullish for stocks if it is due to an improvement in supply-side dynamics, but bearish if it is demand driven.
Is the BoE’s emergency intervention in its bond market a British idiosyncrasy that global investors can ignore? No, the UK’s near death experience sends three salutary warnings, with implications for all investors.
Stay defensive at least until the US midterm election is over. Gridlock is disinflationary in 2023 and hence marginally positive for US equities. But any relief rally will be short-lived as recession risks are very high.
Our preferred tactical global fixed income trades for the rest of 2022 into early 2023 are all expressions of our views on relative monetary policy shifts within the main developed market economies. These involve bets on a relatively more hawkish Fed and Bank of England versus a relatively more dovish ECB and Bank of Canada, while also betting on additional selling pressure on Italian government bonds.