Macro Monitor

Political risks linger and the M&A picture remains active.

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Bond market volatility picked up quite a bit in May but the higher-low/higher-high pattern in the 10-year yield is still intact, indicating the primary uptrend has not reversed.

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Volatility among non-equity asset classes has gone up noticeably while the VIX dipped lower. We still expect volatility to stay high and continue to play defense within fixed income.

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Political and geo-political concerns linger while we are entering a seasonally unfavorable window. Maintain Neutral.

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We expect volatility to stay high and still recommend defensive positions within fixed income.

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 April saw a valiant attempt by the U.S. 10-year yield to crack the upper band of the multi-decade downtrend channel (around 3.0%-3.05%).

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Volatility has stayed high as political and geo-political concerns linger while the central bank liquidity reduction is underway. 

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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.

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Our overall view toward credit has turned decidedly cautious over the last couple months and that includes our long-term favorite.

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While concerns about a trade war might be easing and the credit market has been largely unaffected by the surge in Libor rates, we have to recognize the fact that Trump’s policy focus has become increasingly market-unfriendly while global central banks are in a liquidity-reducing mode.

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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.

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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.

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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.

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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.

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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.

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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.

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

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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.

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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.

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

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