Articles by Chun Wang, CFA, PRM Director of Multi-Asset Strategies

Isn’t a trade war more bark than bite? We think a full-blown trade war may be eventually negotiated away but the process is not necessarily painless to investors.

The latest headline and core numbers are in-line with expectations. The breakeven rate retreated from the resistance level but the yield curve flattened again. Despite the overall mixed bag of macro data, there are more positive signs for inflation.We have been recommending patience when it comes to inflation because overall inflation trend is still pretty well contained.

Higher volatility when credit spreads are already thin makes even the higher-quality issuers less immune to credit sell-offs. We tactically reduced these bonds to Neutral.

While the late rebound in risky assets pared back earlier losses, weakness was observed in all major risk asset classes. We continue to recommend defense for the time being.

A potential trade war (not quite there yet) is not good for the dollar as it will inevitably invite retaliation and sour sentiment toward dollar assets.

The U.S. 10-year ended the month 15 bps higher but non-U.S. bonds fared much better with bond yields in Europe and Japan 4-5 bps lower.

The net impact of the tax reform is significantly positive to investment grade companies as the interest deductibility change has very little impact.

Our Risk Aversion Index turned higher last month but stayed on the “Lower Risk” signal as of the end of January. The first few days of February brought a big surge in this index and would suggest a “Higher Risk” stance for the near term.

With the dollar index breaking below the 2017 low, we believe the dollar bull market that started in 2011 (based on the trade-weighted dollar index) is most likely over.

The latest Core CPI number beat expectations but the yield curve flattened. The market shows more conviction about the Fed’s rate hikes than longer term inflation. We recommend patience and we don’t believe missing out on the first few months of higher inflation will cost us dearly.

The new tax bill will be another tailwind for these bonds as Corporate bond issuance is likely to be reduced going forward.

Our Risk Aversion Index turned lower in December and reached an all-time low. We remain favorable toward higher quality credit within fixed income.

The most common 2018 time-cycle pattern among major markets is a fall correction, with the U.S. and Japan faring better than their European counterparts.

While we still believe flattening is the more likely scenario over the medium term, we do feel the recent flattening move is a bit overdone and there are several divergences that suggest a short-term steepening correction is in store.

The latest Core CPI number disappointed again. The divergence between inflation break-evens and the yield curve is puzzling. Given the lack of inflationary pressure and the Fed’s projected rate path, it would not surprise us to see a flatter curve without the help of fiscal stimulus in the next few months.

These bonds were quite stable during the credit sell-off in November and they remain good candidates for earning the carry.

The index ticked up on the back of higher VIX, a High Yield credit mini sell-off, and EM underperformance. We are turning a bit more cautious toward credit but still recommend safe spreads within fixed income.

The calm appearance of the 10-year yield masked a big curve-flattening move that has accelerated the last few months.

The latest CPI numbers are in-line with expectations. The divergence between inflation break-evens and the yield curve is worth close monitoring. Given that the global recovery is still intact, we don’t think the current inflation picture justifies the flatness of the yield curve.

If the new tax plan gets passed, Corporate bond issuance will likely decrease while demand remains strong.