Market Returns
Some near-term upside in Treasury yields is very likely as flight to safety flows begin to unwind. However, given that global growth divergences remain in place, we will continue to look for an opportunity to increase duration on any meaningful back-up in yields.
For the month of June, the model performed in line with both global equities and the S&P 500. For the month of July, the model is increasing its risk exposure.
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.
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?
The Russo-Chinese relationship got a diplomatic boost this week, but can China provide Russia with the capital it needs to boost productivity meaningfully?
Rising policy uncertainty is negative for global equity multiples.
Government bond yields will remain at depressed levels as investors stay in safe haven assets given the lack of clarity on the next steps in the Brexit saga.
At the margin Brexit only serves to reinforce the divergences in global growth that were already in place. Maintain duration at benchmark and look to increase duration exposure on any meaningful back-up in Treasury yields. Corporate spreads are still not attractive, but any Brexit related sell-off could present an opportunity to initiate a tactical overweight.
The health care sector is poised to resume its bull market, but the character of the rally will change. Sell hospitals and buy biotech.