Global Macro Outlook and Strategy: Global Rates, Commodities, Currencies and Emerging Markets

Research evidence excerpt

Global Macro Outlook and Strategy: Global Rates, Commodities, Currencies and Emerging Markets

Overall summary

US Rates

Another strong month of job growth could lower the bar for markets to price in further tightening, and we see risks markets could price in more

tightening over the next year. Intermediate Treasuries have underpriced this risk: 10-year yields are trading 27bp below their model-implied fair

value, leaving the risks skewed toward higher yields over the medium term. We remain patient before entering outright duration shorts, as quarter-

end rebalancing dynamics leave room for yields to decline near-term given equities’ outperformance versus fixed income. Maintain 10s/30s flatteners

as a low-beta way to position for higher yields with a relative value overlay. Stay short 10-year Treasuries versus Bunds.

International Rates

DM yields extended the post US-Iran MoU rally this week as declines in energy prices are easing inflation concerns, although US rates continued to

underperform after the recent hawkish Fed shift. We continue to think that European yields are likely to remain range-bound. We expect carry to be a

key theme for the coming months amid a backdrop of moderating volatility and usually lighter market activity through the summer.

Currencies

 We transitioned from “Bullish beta, bearish USD” to “Bullish beta, bullish USD” in March; hold this view in H2. EUR/USD downside target revised

down to 1.10; USD/JPY 164, USD/CNY 6.70 both unchanged. The baseline view is low-intensity (USD index +3%), but with recognition that the

onset of a Fed hiking cycle usually coincides with trend USD strength ~ 5%. Carry is a gift that keeps on giving, remains an “AI proxy” and has been

a more consistent generator of returns than the dollar; stay bullish in 2H.