Government

This week’s report looks at Japan, with the recent BoJ meeting. While a trade war has injected uncertainty into the Japanese economy, our conviction remains high that JGBs will underperform other government bond markets, and the yen will ultimately rally. That said, JPY is due for a tactical pullback. 

The US and Canada will resolve their trade dispute quickly, leading to a North American deal and better prospects for future relations, as well as for other US trade deals around the world. But even as tariff threats decline, the US economy will slow, weighing on its neighbors. Canada will fare better than Mexico.

Do not play the bounce in US and global cyclical assets as Trump backpedals from the trade war. China will talk, but the pace will be slow and the outcome disappointing. Fiscal stimulus will surprise marginally in the EU, China, and even the US, but still may not rescue the business cycle. 

Following the escalation of the US-China trade war, the Reserve Bank of Australia is priced to cut rates most aggressively among its G10 peers. Across the Tasman Sea, the Reserve Bank of New Zealand has already cut rates aggressively, but the economy has yet to respond to this policy easing. This Special Report will examine the prospects of monetary policy for both of these central banks. 

Upgrade the odds of a full-scale war in the Taiwan Strait from 5% to 10%. Rapid escalation of US-China economic war raises the probability of tensions spilling into the military-strategic domain. Investors should buy insurance against this tail risk while it is cheap. Meanwhile, use this year’s trade shock and equity volatility to increase allocation to EM manufacturing states.

This week, we look at the sustainability of the HKD peg as the next whale to move markets, given what is happening to tariffs. After careful analysis, our bias is that it is here to stay. With the DXY dipping below 100, we are likely to see a rebound, which is actually bad news for the Hong Kong region of China, since it will tighten financial conditions. We have no new short-term trades, but if the peg broke, you want to be short HKD/JPY.

The March employment report showed strong job growth, but the labor market remains in a fragile state and the demand shock from tariffs could be the catalyst that tips it over the edge into recession. 

Trump's Tariff D-Day brings a negative surprise to financial markets already anxious over a declining US cyclical economy. Investors should sell risky assets, increase safe havens, and overweight US assets in the near term.

This report looks at investment implications, for Norwegian assets, given the recent meeting, from the Norges Bank. 

Stocks will continue to struggle in the second quarter as President Trump tries to implement tariffs. Tax cuts will only temporarily dispel growth fears, if at all. Middle Eastern instability will add oil price surprises to an environment that is looking fairly stagflationary.