Economy
A number of divergences have emerged in global financial markets. These gaps are unsustainable. The recent improvement in Asian trade/manufacturing has been largely due to firming demand for electronics/semiconductors. Meanwhile, demand/output for industrial goods and basic materials - the areas leveraged to Chinese capital spending - remain weak. Fixed-income traders should bet on yield curve steepening in India: receive 1-year/pay 10-year swap rates.
There is no evidence of a sharp increase in China's state sector investment in recent months. This, together with the cautious private enterprises, explains why overall Chinese investment has remained downbeat. Public sector investment spending will likely accelerate going forward, which should continue to support business activity.
Yield and Protector Portfolios should continue to benefit in current environment. Equities face seasonal headwinds.
Housing activity should accelerate in the back half of the year given the drop in Treasury yields. Buy home improvement retailers and add to long homebuilding positions.
A benchmark overall duration stance is still warranted, as central banks will maintain exceptionally accommodative monetary policies to offset potential Brexit-related shocks to confidence.
The Brexit vote will either usher in the complete dissolution of the euro area, or it will prove to be a blessing in disguise. Our bet is the latter, but the next few months are still likely to see heightened political uncertainty and elevated financial volatility, warranting a cautious stance towards risk assets. Investors have become too complacent about the prospect of Fed hikes over the coming years. Even a slight upward move in rate expectations could cause the dollar to surge. Underweight U.S. stocks in currency-hedged terms.
Global uncertainty is elevated, but markets know this. Brexit could prove extremely negative for the global economy if it prompts a questioning of the EU's integrity. The cyclical outlook for the pound remains poor, but a short-term opportunity to buy GBP/JPY has emerged. We still like the SEK and commodity currencies. The SNB will continue to intervene, but the peg is increasingly dangerous.
Post-Brexit uncertainty will continue for some time. But we were already cautiously positioned, and would not go any more defensive.
Even if commodity markets are not yet pricing a higher probability of fiscal stimulus following the U.K.'s Brexit vote, we believe they will begin doing so in very short order.
The Brexit drama has moved from the realms of psephology into the realms of game theory. How will the game play out? And how will the economy and financial markets react?