Hangover or Party On
US investors have enjoyed a year’s worth of returns in seven weeks. This has been a rally of everything – except oil. Even real estate has had its moment in the sun. US Equities are approaching overbought territory and will probably get there by the end of December. US Treasuries – long and short – will get there in January, at the current rate of progress. But US and European credit is already there. There has to be some sort of reaction to recent strength. We expect credit markets to weaken first, which will be used to justify the recession narrative, which will then impact equities. Government bonds may continue their rally for a while, but we think the big theme for the year will be the US budget deficit. Round 1 is in January, the next one is in Q4. Bond vigilantes are not dead, just sleeping.