Europe
The median voter theory is one of the few genuine theories of political science. It assumes that voters have limited policy priorities and that politicians want power. Therefore the latter will adjust their stances to satisfy the largest swath of voters. The median voter in the Anglo-Saxon world is shifting to the left, and regardless of what happens in the Brexit referendum or the U.S. election, this shift will be the most consequential development for markets.
The RMB has been steadily depreciating versus the U.S. dollar and has dropped to a new cyclical low versus its trade-weighted basket. All the while, Chinese domestic interest rates have lately drifted higher. When global investors wake up to these dynamics, global share prices and EM risk assets will likely sell off anew. In Mexico, initiate a new yield curve trade: receive 10-year / pay 1-year swap rates.
In this <i>Special Report</i>, we revisit our list of signpost economic indicators introduced two years ago to identify if the U.S. and Euro Area were falling into a "Secular Stagnation".
A Spanish bull, a euro bull, and an equity bear.
There is a risk that global bond yields move higher in the near term, although we prefer to position for that move <i>via</i> cross-market spread, yield curve and inflation trades.
Markets will remain stuck in a trading range, driven by two policy feedback loops: the Fed's and China's.
The BoC will continue to watch from the sidelines. Our short-term model shows that the Canadian dollar is modestly cheap after having reached technically overbought levels earlier this month.
While it is impossible to time the stock market, even a system whose results are slightly better than a coin-flip can still generate significant <i>alpha</i>. Overweight equities when valuations are favorable, growth is advancing, and financial conditions are easing. Stocks tend to do best when sentiment is bearish but improving, and the market has started trending higher without yet going parabolic. The outlook for U.S. stocks is rather mixed; Europe, Japan and China should outperform (currency-hedged).
For the month of May, the model underperformed both global equities and the S&P 500. For the month of June, the model is further paring back its risk exposure.
The latest conclusions from the sector-based (right) way to pick stock markets. Plus some important conclusions for credit markets.