United States

The recent bear-steepening of the US Treasury curve has been driven by the combination of stronger-than-expected economic growth and stable Fed rate expectations. Historically, such periods do not last very long, and we see the current bear-steepening episode ending soon. We also highlight an opportunity in Agency MBS.

Q3-2023 is expected to mark the end of the earnings recession for the past three quarters, opening the door to positive earnings growth. Whether that would be sustainable or will sputter once the recession settles in as expected in 2024 remains to be seen. However, much of earnings growth is already priced in.

More equity volatility is coming in the short run. Trump’s nomination looks to be smooth, which marginally reduces the incumbent party advantage and increases policy uncertainty.

Yields remain the force dominating the evolution of markets. A peak in yields would help European assets rebound, but the war in the Middle East could push higher energy prices, with negative consequences for Europe.

Investors underestimate the likelihood of the war in Israel spilling outside of Gaza, and engulfing wider swaths of the Middle East, endangering energy supplies. Stay overweight Energy and Aerospace & Defense.