Europe
True inflation rates in the euro area and in the U.S. are actually not that different, making the polarized divergence in expected monetary policy very difficult to justify.
The 10-year Treasury yield's post-crisis pattern suggests that a monetary policy catalyst is required to spur a material increase of around +100bps or more. In this <i>Special Report</i> we do a survey of the major developed market central banks to assess whether any could possibly incite such a "bond tantrum" during the next six months.
The question of how far central banks should go in their efforts to boost growth is becoming increasingly controversial. In this <i>Special Report</i>, BCA Chief Economist Martin Barnes outlines his personal view that monetary policy has done enough. He will debate this issue with Peter Berezin, BCA Chief Global Strategist at next month's BCA Conference in NY.
U.S. inflationary forces remain tame, forcing the Fed to maintain an easy bias. Yet, the global economy is improving. This confluence could weigh on the dollar and boost commodity currencies. The NZD has more upside, but it will lag petro currencies. The BoJ will act, but timing is uncertain. Keep a negative bias toward the yen. CAD/NOK has more downside.
More aggressive monetary and fiscal stimulus will be necessary to resuscitate the Japanese economy. While the BoJ's forthcoming review is likely to endorse the current policy stance, there is a good chance that Kuroda will open the door to more radical measures. These measures will push down the yen, giving Japanese stocks a lift in the process. Sentiment on the U.K. economy has gotten too bearish. We are closing our short GBP/SEK trade and going long GBP/JPY.
The euro area's NPL problem is unlikely to be solved quickly, constraining bank profitability and the capacity to lend. There are three important repercussions for investors.
The tailwind of better-than-expected global growth and highly supportive monetary policy has the potential to push global spread product into overshoot territory.
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.
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.
In July, the model outperformed both global equities and the S&P 500 in local-currency terms, while underperforming in U.S. dollar terms. For the monthly of August, the model made no changes to overall risk exposure.