The Unreal, Real Yield

Friday, September 16th, 2022

Inflation expectations in the US are still too low.

There is a big mismatch in US inflation expectations, with 10-year breakeven rates anchored around 2 percent, survey data at 5 percent and core CPI at over 6 percent. We think the latter figures are far more realistic, which means that the US fixed income and equity markets could be in for a nasty shock. We also think that global currency markets are becoming disorderly and that the yen, euro and sterling will all test historic lows against the dollar. It’s not a “sell-everything” strategy, but it is closely related. There may soon be an interesting opportunity in EM Equities and EM Bonds. The last bull market in EM Equities started about three months before the dollar index hit its last high in late 2001 and we see other historical parallels which spark our attention,

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Currency, Currency, Currency

Friday, September 2nd, 2022

Euro and sterling FX markets could become disorderly.

Nobody likes to consider the prospect of a currency crisis, but we think this is getting more likely by the day. We have long thought that the hiking cycle in the US would cause at least one major asset class to come unstuck.  When we wrote the original note, we didn’t think it would be European currencies, but this is what the price action now suggests. Both sterling and euro have broken down out of previous trading ranges and both could test historic lows if the FX markets become prisoners of their own momentum, as sometimes happens. European investors need to own as many natural hedges as they can – US issuers in credit and dollar earners in equities.

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