Developed Countries

U.S. dollar softness may be sparking a subtle shift in sub-surface dynamics, to the benefit of select deep cyclical industries. Switch from rails into electrical equipment, and take profits in data processing.

Somewhat like 1998, the dilemma for the Fed is that the labor market is approaching full employment and may justify eventual interest rate hikes.

Media stocks are undergoing a de-rating, led by the heavyweight S&P movies & entertainment index. Sales prospects have been undercut by shifting viewing habits, which is creating uncertainty surrounding the value of network assets. The ISM services index warns that recreation spending will continue to retreat, which also has implications for ad revenue. Our Advertising Indicator is already deep in negative territory, consistent with the overall profit contraction and our expectation that the corporate sector will retrench. Meanwhile, programming costs remain high, adding to profit margin stress emanating from weakening top-line performance. This toxic mix should ensure that all of the shareholder friendly activities that have supported valuation expansion since 2009 will dissipate, to the detriment of premium multiples. We have a high-conviction underweight on the overall media sector, including the S&P movie & entertainment index. The ticker symbols for the stocks in this index are: DIS, CMCSA, TWX, TWC, FOXA, CBS, OMC, VIAB, IPG, NWSA, DISCK, TGNA, CVC, SNI, DISCA, FOX, NWS.

Refining stocks have been slammed this year, and we expect more pain ahead. Companies had continued to operate at full throttle, as measured by the relentless advance in refinery production (second panel), likely reflecting expectations for ongoing demand strength and decent export markets. However, both gasoline and refined product inventory have been steadily building since last year, warning of excess inventory accumulation. Worse, refined product consumption is contracting, underscoring that it will take output cuts to work through the supply glut. Refiners have an incentive to pull back, given that refining margins are essentially nil, but the implication is a potentially sizeable profit hit. The index is not priced for an earnings downturn. We maintain our high-conviction underweight. The ticker symbols for the stocks in this index are: MPC, PSX, TSO, VLO.

It has been the perfect storm for a sharp appreciation in the Japanese yen. The immediate catalyst for the strengthening yen was the sell-off in global risk assets. However, the fundamental case for a stronger yen had been building for some time.

Special Report

A rebalancing of oil supply and demand will lead to higher crude prices later this year. The Canadian dollar and Norwegian krone will benefit, but it is still too soon to buy these currencies versus the U.S. dollar. For now, we prefer to play the long side in the CAD and NOK <i>via</i> cross trades.

Plunging commodities have been driven by increased supply and falling investor demand, not a major downshift in physical demand. Stay neutral global equities. The earnings outlook remains uninspiring, but bottoming oil prices and continued monetary stimulus support valuations. The selloff in global bank shares reflects NIRP-related "income statement worries", not "balance sheet concerns" linked to deteriorating credit quality. Downgrade Treasury notes to neutral. The rally in bonds has brought 10-year yields near our long-standing, out-of-consensus target of 1.5%. 

Special Report

Central bankers fail to grasp that in a non-linear world, it can be futile and dangerous to set an over-precise target for inflation. Today, European banks are the victims of such misguided linear-thinking.

Special Report

Rebalancing in the oil market later this year will arrest the negative feed-back loop driving markets' inflation, interest-rate and FX expectations, particularly for non-OPEC oil-exporting countries.