Japan

The British pound may be prone to further weakness in the coming months as the odds of a Brexit rise.

While the FOMC was more dovish than expected, rising inflation may cause the Fed to escalate hawkish rhetoric. The bounce in oil should help high-beta stocks. Underweight U.S. equities versus Europe, Japan and H-shares. We estimate U.S. equities will deliver returns of 4%, ann. over the next 10 years, <i>vis-à-vis</i>  9% for the euro area and Japan, and 14% for H-shares. Central banks have more options to combat any possible debt-deflation spiral in Europe/Japan/China than is often recognized.

A surprisingly dovish outcome from this week's FOMC meeting has led to broad-based weakness in the U.S. dollar. The monetary policy divergence supporting the dollar may have peaked.

Similar to the euro area, Japanese consumer discretionary stocks have a long runway ahead. Japan is the latest country to join the NIRP club following the late-January BOJ surprise move to charge deposit-taking institutions a negative deposit rate. While interest rate suppression has negative connotations for Japanese banks, it should spur demand for discretionary consumer outlays if it breaks the deflationary consumer mindset. The top panel of the chart shows that relative share prices are inversely correlated with interest rates and the current message is to expect a rebound in Japanese consumer discretionary relative performance. Japan's NIRP should also lure banks to focus on loan volumes. Loosening bank credit standards typically boost discretionary spending. Importantly, a wide gap has opened between loan growth and relative share prices, which will likely narrow via a catch up phase in the latter. Meanwhile the Japanese labor market is tight, but this is neither reflected in relative consumer discretionary share prices, nor in relative valuations (third & fourth panels). Bottom Line: Overweight Japanese consumer discretionary stocks. For additional information on global consumer discretionary stocks please read the Global Alpha Sector Strategy report titled "In the Eye Of The Hurricane" at gss.bcaresearch.com. (Part III) The Global Consumer Discretionary Juggernaut Is Over (Part III) The Global Consumer Discretionary Juggernaut Is Over

This <i>Special Report</i> reviews all of our active recommendations, including our over/underweight country and asset allocation positions, as well as our current tactical trades.

The euro stopped weakening in March 2015, which coincided with the ECB starting its asset purchases. Since then, the ECB's incremental policies have been unable to push the euro lower. The price action speaks to the resilience of the currency and indicates that a lot of bad news has been discounted.

In recent travel, our clients remain focused on downside risks to today's range-bound markets. And for good reason. Uncertainty regarding Chinese reaction function is the biggest source of political risk in today's markets. We discuss it in detail in this month's report, along with an update on our views of Brazil, Russia, and Turkey. In addition, we examine the potential casualties of the European immigration crisis and the likelihood of Donald Trump becoming the president of the United States.

Over the coming two weeks, the G3 central banks will be holding key policy meetings that could prove instrumental in setting major FX trends for the next several months. What can currency traders expect?

Near-term, global yields will remain depressed, but the structural forces suppressing yields should abate and even reverse in the long-run. Slower potential GDP growth - and lower commodity prices - will eventually shift from tailwind to headwind for bonds. Stepped-up efforts to increase inflation will boost long-term nominal yields; populist politics and calls to curb income inequality will amplify this trend. Long-term investors should stay neutral global bonds for now, but prepare to shift to a structural underweight beyond this decade.

Are the arguments for overweighting European equities still valid? If so, overweighting relative to what?