- European credit buying opportunity: since mid-August, US IG credit spreads have tightened while European spreads have widened. With the rise in underlying sovereign bond yields, Euro IG credit yields are at their highest in almost 3 years. Positive on Euro IG credit as BBB bonds now yield 4.4%, i.e. 1.2% higher than in February.
- Diesel and natural gas prices hold the key to central bank rates: record refining margins are a bigger global inflation issue than even crude oil prices. Thus, central banks are largely hostages to events in the Gulf. Increasing Gulf energy exports could trigger lower diesel and natural gas prices, and in turn cool inflation pressures.
- Bond markets likely overprice central bank hiking cycles: US 2-year Treasury yields have risen 0.75% and German 2-year yields have gained 0.5% in the last month. Both effectively price 3+ further rate hikes by mid-2027. We feel that this is too much. We like short-term bonds as cash alternatives at this point.
- A gradual Fed rate hiking cycle does not kill a stock bull market: in past Fed rate hiking cycles, US stocks have generally gone up. The key is the speed and extent of rate hikes. Fast/prolonged rate hiking cycles have generally led to recession and bear markets. But we expect a gradual/modest hiking cycle: this can extend a bull market.
- Moving Overweight US, Underweight Europe on a relative basis, maintaining our overall Positive call on global equities. Technology sector earnings momentum should continue to lead the stock market, benefitting the US and Emerging Markets. Europe remains buffeted by energy prices and sovereign debt concerns.
Edmund Shing
Chief Investment Officer
