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

We expect a hold next week with little new guidance from Chair Warsh but see hawkish risks in the statement and discount rate. Front-end yields

have not fully kept pace with the hawkish shift in Fed rhetoric: we find scope for yields to rise modestly from here, even if the Fed remains on hold,

but we do not want to chase this bearish impulse and prefer curve flatteners, as bearish JGB dynamics have kept the curve steeper this month: we

enter 5s/30s flatteners, but are aware that a dovish Fed could bullishly steepen the Treasury curve, and beyond next week, that any significant

change to Treasury’s forward guidance could push the curve steeper as well.

International Rates

The re-escalation of US-Iran tensions continued to be in focus last week. The rise in energy, and particularly gas, prices has driven EUR area yields

back to or slightly above their March peaks. The ECB left policy rate unchanged keeping alive a 25bp hike in September with the press conference

not surprising markets.

Currencies

 Two focal issues: resurgence in energy prices and rising interest rates; both supportive of USD and carry. Stay bullish USD pre-FOMC; USD has

one-sided sensitivity to oil and is undershooting rates. Higher energy prices boosting carry returns as exporters (importers) are high-yielders

(funders). Empirical sensitivity to energy prices is highest for the euro bloc. EUR vulnerable with gas prices rising and regional storage low. BoJ,

BoE unlikely to turn the tide for yen, GBP. Trade policy vol turning up, but only narrow FX implications for now.

Commodities