Fiscal
The fiscal spending impulse in China is still positive but receding. The nation's productivity and potential GDP growth are bound to decline due to a rising role of government in capital and resource allocation. Hence, cyclical stabilization could well be overwhelmed by a structural slowdown. Another bubble is forming in China, this time in the corporate bond market. The amelioration in Korean and Taiwanese exports is due to the technology sector/semiconductors, and does not reflect broad-based improvement in global trade.
The secular bond bull market is over. Safety is in a bubble. The shift from monetary to fiscal easing is the most likely candidate to prick the bubble in safety.
In this piece we revise our yield portfolio to increase its resilience to interest rate shocks.
The lack of inflation makes a Fed rate hike before December unlikely. In the interim, the continued flow of liquidity could sustain the high-risk rally.
Brazilian risk assets have rallied on the back of investor optimism about the impeachment of President Dilma Rousseff. But the political games have just begun. With all politicians looking to the October municipal elections and 2018 general elections, the Michel Temer administration is unlikely to impose fiscal and structural reforms. Debt dynamics are set to worsen, and we continue to short Brazilian equities.
Government bond markets have likely overestimated the degree of policy dovishness that is likely to be delivered by the major central banks in the next few months.
The contours of a deal to solve Italy's banking problems are starting to emerge. This is good news for European risk assets. Nevertheless, reviving Italian growth will require even more ECB easing. The appetite for radical measures is low at present, but this will change if euro area growth remains lackluster and efforts by Japan to introduce helicopter money policies prove successful.
The 35-year bond bull market is coming to an end and the downward sloping trend channel for yields is changing to flat. Asset allocators should trim duration and fixed income exposure.
This week, we are sending a <i>Special Report</i> written by BCA's Chief Global Strategist Peter Berezin, discussing the end of the 35-year global bond bull market. In addition, we are also sending you a joint <i>U.S. Bond Strategy/Global Fixed Income Strategy Weekly Report</i> which discusses the end of the secular bond bull market and the implications for global bond strategy.
This week, we are sending a <i>Special Report </i>written by BCA's Chief Global Strategist Peter Berezin, discussing the end of the 35-year global bond bull market.
The latest data releases confirm that the Chinese economy regained its footing. In the near term, growth figures should continue to surprise to the upside. Earnings preannouncements by Chinese listed firms show a significant acceleration in earnings in the second quarter from a year ago, while the market continues to expect sharp earnings contractions for Chinese companies.