Policy

This week’s Special Report updates our US default rate forecast and considers whether corporate bond spreads offer value given the trend in credit fundamentals. We also consider the relative value proposition between investment grade and high-yield credit and between European and US corporate bonds.

Talks of a détente are premature and there is no domestic political basis in China or the US to support a true détente. Investors should not underappreciate global risk, on the basis of a détente, and should avoid Greater China equities in the next 18 months.

Assuming yesterday’s policy rate hike is a sign that Turkey is finally veering towards orthodox economic policies; should investors rush in?

We are strategically bullish on the outlook of the energy sector. Domestic and external political constraints asserted themselves, restraining the most negative impulse against this sector by the Biden administration. Go long energy versus cyclicals (ex-tech).

This week’s report examines three potential catalysts that could push Treasury yields meaningfully higher within the next few months. We also consider the rebuild of the Treasury’s cash holdings and its implications for the Fed’s balance sheet policy and financial markets.

China is facing a risk of deflation. Marginal interest rate cuts and targeted stimulus will be insufficient to boost China’s growth given the current deflationary mindset and the danger is that the economy may be entering a liquidity trap. Deflation is bullish for government bonds, but negative for equity prices. Chinese share prices will continue to decline.