Financial Markets

With recent comments strongly hinting that the Fed is on track for a rate hike in December, the dy-namics of the Fed Policy Loop make spread product appear extremely vulnerable.

Transport stocks have discounted a recession, trading below trough bear market relative valuations. That is too cheap given signs of stabilization in global export growth.

The August payrolls report did not change our view that a Fed rate hike is likely in December, but not before that.

The dollar is likely to enter the bubbly stage of its bull market within the next 12 months. The key culprit for this move will not be the Fed, but easing by non-U.S. central banks. The euro area economy could enter a temporary soft patch, but this will not result in an imminent easing by the ECB.

The downside risks to the RMB are mainly an overshoot of the dollar as the Fed raises rates. The PBoC will allow the RMB to fall against the dollar if the dollar strengthens broadly, but a freefall is not in the cards. The RMB is unlikely to fall more than 5% against the dollar in the next 12 months, unless the latter appreciates by over 10% in trade-weighted terms.

The DM Country Model favored Italy again at the expense of Spain mostly on liquidity change. Japan and the U.K. remain the largest two underweights.

We reveal what our most-trusted leading indicators are predicting about the major economies, and end with a provocative conclusion.

Recent shifts in the Fed's policy stance are bullish for the dollar, negative for commodities and emerging markets, and positive for assets with a yield. They also suggest risk assets will continue to perform decently.

Given the rising odds of another Fed move before year-end, and the uncertainty that additional easing can be delivered in Europe and Japan, we re-iterate our tactical call to maintain a below-benchmark duration stance.