FICC
One macro framework for rates, FX, credit, and commodities, helping investors connect cross-market signals and position with clarity and conviction.
As the sole shock absorber left in the global economy, FX markets will grow more volatile. The currency market's reaction to the recent Fed minutes exemplifies this phenomenon. Despite its sores and blisters, the U.S. economy wins the global beauty contest. Caught between those forces, the USD will continue to weaken over the next quarter or two before resuming its broader bull market.
Gold will remain well bid over the short term. The surge in demand that pushed prices up by 20% ytd (Chart of the Week) will continue to dominate supply growth.
Within an overweight allocation to Euro Area corporates versus U.S. corporates, favor single-B rated Euro Area High-Yield and Euro Area Investment Grade sectors that offer higher duration-adjusted spreads.
Stronger GDP growth will permit the Fed to hike rates once more before year-end, no earlier than September. However, the feedback loop between the Fed and financial conditions will prevent a second rate hike this year.
The Fed is accentuating bearish dynamics for the dollar over the next three to six months. The upcoming National Congress of the Communist Party of China provides Chinese authorities with an incentive to ramp up stimulus this year. The new Treasury semi-annual report pre-empts meaningful direct interventions to soften the yen. More than just Brexit risk is weighing on the pound.
The pace of U.S. oil supply destruction accelerated at the end of April, as yoy losses increased to 470 thousand barrels per day (Mb/d) for the week ended April 29.
The trading action of gold is currently sending a bearish message on the dollar as the price of the precious metal has broken above critical resistance. Though the causation between the dollar and gold usually runs from the former to the latter, gold also has a tendency to sniff out broad-based moves in the greenback. We remain broadly short USD in our portfolio.
