Current international relations are becoming increasingly strained, both in terms of trade and geopolitics Biden’s Administration tariffs, Putin visit to Beijing amidst military cooperation between the two countries seems to overshadow the meager gains from Xi’s recent trip to Europe.
On the macro front, the latest inflation figures for the US and Eurozone have reassured bond markets, leading to declining yields over the month At the same time, increasing expectations of a soft landing in the US are supporting the view that a rate rise was out of question We stick with the view that continued disinflation in the US and Europe should enable central banks to ease monetary policy in 2024 with the ECB acting first.
Financial market volatility remains low in spread products and stock markets, allowing cheap hedging exposures.
Two major conviction: 1/ the further we go with reassuring inflation figures, the more we’ll find a way to keep interest rates down it’s worth taking on interest rate risk through credit; 2/ still positive on the EU and US equity markets the closer we get to lower interest rates, the more we’ll have to diversify into the EMs (interesting story on commodities, especially industrial metals and Latin America).
Cash is still attractive, both in EUR and USD.
Sovereign yields are attractive on an historical basis but the debt burden makes corporate balance sheet fundamentally more attractive, while being selective.
Valuation on Credit are not cheap but carry is very attractive, with the slope of spreads offsetting the inversion of the yield curve : – Investment grade, which historically delivered positive returns during soft landing scenarios, are favored in the US on the belly of the curve 5 to 7 years). – In Europe, Capital structures and CrossOver are offering attractive risk/reward Worth noting that credit fund inflows support valuations that may appear expensive. – Emerging market external debt spreads have slightly tightened in May and valuations remain stretched but some regions offer attractive risk/reward.
In Equities, markets are not exuberant but remain buoyant ahead of the major central bank’s first rate cuts. We expect concerns about the US elections to start negatively impacting equity markets by late summer.
