Financial Markets

Three strategies that could win whatever the outcome of Britain's referendum on EU membership. And what to look out for in the final days before the vote.

The exponential rise in banks' non-standard credit assets has occurred in spite of the government's efforts to contain and regulate it. The government does not have full control over shadow banking and non-large banks. These have become a large part of the credit system. Hence, the assumption that the central government in Beijing can sustain any rate of credit growth it desires is overly simplistic. Short small bank stocks in China.

At current levels, Treasury yields are consistent with our assessment of fair value. Further, the Fed's Labor Market Conditions Index does not suggest an imminent recession. Expect payrolls to stabilize above levels consistent with further progress on wage growth and inflation, allowing the Fed to hike rates later this year.

For now, maintain a benchmark duration stance leading into the June 23 U.K. Brexit vote, favoring Treasuries and (especially) Gilts over Bunds and JGBs.

Risk assets will take their cues more from the dollar than the Fed if the euro rises above its 16-month range against the dollar. Retain exposure to energy equities and gold.

This week's report discusses whether bad news is good news for stocks, or a potential restraint. Tumbling long-term yields argue for augmenting consumer discretionary sector weightings, <i>via</i> the movies & entertainment group.

The 1990s mid-cycle slowdown is an appropriate analogue to current market conditions. A lower dollar was the key ingredient the easing in monetary conditions that resolved this episode. This suggests that today, as the sole economic lever left, the greenback has further downside. Go short USD/SEK. Go long a basket of NOK, CAD, AUD and NZD against the USD.

The disappointing May payroll report does not foreshadow an imminent economic downturn. The Japanese government's decision to postpone next year's VAT increase and introduce fresh fiscal stimulus should help jumpstart growth. On the flipside, the Fed is likely to restart its hiking cycle in September and the Chinese government will crack down later this year on what it regards as excessive credit growth. More worryingly, the odds of Brexit have increased over the past few weeks. Go tactically short European stocks (in dollar terms).

China's 4.7 trillion RMB (~ $720 billion) fiscal stimulus program will be more bullish for base metals, particularly copper, than we initially surmised.