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

A re-escalation of US-Iran tensions has brought energy prices/inflation concerns back into focus this week, leading to a sharp sell-off across DM

towards the top of the recent trading ranges. With upside tail risk events in energy markets appearing contained and limiting the risk of a further

substantial sell-off, we entered tactical longs in 10Y Bund and 10Y gilts.

Currencies

 Despite this week’s Middle East flare-up, we view the bar for a Strait closure and return to Q2 war-peak conditions as high. Even so, our bullish

dollar, bullish carry portfolio orientation financed via energy importing low-yielders is well placed to absorb another inflationary geopolitical shock.

The AI and global capex upcycle remains intact through the ongoing volatility in tech stocks, and the absence of German fiscal optimism is a

meaningful headwind to any US-to-Europe equity rotation accompanying sectoral churn and broadening out equity strength.