Economy

The tailwind of better-than-expected global growth and highly supportive monetary policy has the potential to push global spread product into overshoot territory.

The combination of strengthening global growth and more accommodative monetary policy means that spread product can continue to outperform in the coming months. Despite lingering concerns about credit quality in the corporate sector, we recommend moderately increasing exposure to high-quality spread product.

Last week's blowout jobs report had the beautiful combination of strong growth and flat/rising underemployment rates. This supports our expectation of a Fed hike in December rather than one in September.Accelerating growth when the economy is approaching full employment suggests that the equity bull market is not over, though we are entering a more volatile phase.

A two-speed economy requires selective portfolio construction, favoring consumer-oriented and mainly non-cyclical industries. Put communications equipment on the high-conviction overweight list, and stay clear of refiners.

While the BoE and the Fed are increasingly committed to letting inflation expectations rise, the BoJ disappointed once again. The dollar and the pound are likely to experience broad weaknesses, while gold, the euro and commodity currencies have upside. USD/ZAR will fall further in the short term, but the cyclical bull-market is not over.

With the Fed more sensitive to how its policy affects the global economy, and <i>vice versa</i>, we believe monetary policy will remain accommodative to encourage U.S. and EM growth.

The current risk premium embedded into Brazilian financial markets is too low and will widen as investors come to realize Brazil's unsustainable public debt dynamics. The government is planning a major shift in its fiscal policy framework that will ease pressure to cut budget expenditures, but is bearish for the nation's public debt trajectory. Although the economy could stabilize going forward, financial markets are already discounting a lot of good news. Stay put.

The Chinese manufacturing sector has remained under downward pressure, but the stress level has alleviated compared to a few months ago. The Chinese labor market will likely continue to deteriorate, which will force policymakers to stay accommodative. Despite the recent rally, Chinese investable stocks remain exceptionally cheap.

Eventually the easing of financial conditions will strengthen the Fed's resolve to lift rates. Rate hike probabilities will rise and risk assets will struggle to cope with higher Treasury yields.

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.