Articles by Chun Wang Director of Multi-Asset Strategies

While we are aware of how far markets have moved in the few short weeks since the election, we continue to maintain a Favorable view toward spread products within fixed income.

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In 2016, both the U.S. and the U.K. stock markets tracked their historical patterns quite well but other international equity markets and non-equity markets tracked poorly.

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There are certainly better catalysts this time that make a bear market a distinct possibility, but until a decisive break occurs (most likely when the 10-year gets above 3%), the bull market is still intact.

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CPI numbers were largely in line. There are encouraging signs that inflation is turning on a global basis. The path to sustained higher inflation is not going to be a smooth one and too much enthusiasm can prematurely end this reflation theme. We are encouraged by the general uptrend in inflation and inflation expectations but certainly do not want to take higher inflation as a given.

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The reflation theme got an extra kick after the election. Companies with stronger credit profiles continued to benefit from tighter credit spreads.

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With the Fed’s December hike priced in, we maintain a Favorable view toward spread products within fixed income.

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Market reaction since the election has been right on the money. What we didn’t expect was the speed and the magnitude of the so-called “Trump Trade."

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· Headline CPI was in line but Core CPI missed.

The powerful prospect of a huge fiscal stimulus, a substantial tax cut and meaningful deregulation stoked hopes for higher growth and inflation. The Trump-induced reflation trade is still considered risk positive.  The market is putting a lot of faith in Trump’s new policy package but its actual impact on the economy remains to be seen.

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Regardless of whether the reflation theme continues, high quality spread products should continue to do well.

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· One bright spot in last month’s lackluster market action was that inflation sensitive assets saw impressive relative returns.

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Headline CPI was in line but Core CPI missed.  The current reading still fits the overall “Goldilocks” inflation backdrop and should be considered favorable for the risk rally. The reason behind the recent rise in inflation expectations was the market’s perception of a policy shift away from monetary easing towards fiscal easing.

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Although the spread cushion is thinner than it was a couple years ago, these bonds still offer the attractive combination of quality and spread.

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We maintain our favorable view towards spread products within fixed income, but given the election and the Fed hike risk, caution is warranted.

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The upcoming election is likely to have wide-ranging impacts on both monetary and fiscal policies and we expect election risk to overshadow the Fed policy risk for the time being.

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Inflation is slightly stronger than expected but has no impact on policy decisions. Right now, both the market and the data are telling the Fed to put the rate hike on hold. If the Fed decides to pass in September, there is a very good chance that the Fed might not be able to hike at all this year.

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There is still room for spreads to compress. We maintain our Favorable view of US Investment Grade Corporates.

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Given the not-too-hot-not-too-cold macro backdrop, we expect the credit rally to continue in the near term and favor spread products within fixed income.

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Whether rates hike in September or December, we know the Fed will be very supportive of the market and the biggest beneficiaries will likely be EM and higher-yielding assets.

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Inflation is weak in July but the rebound in oil prices, the renewed weakness in the dollar and the strength in Chinese Yuan are all positive for inflation expectations in the near term. The disinflationary headwinds from outside of the U.S. are only getting stronger, not weaker. It’s hard to disagree with the market’s low rate hike expectations.

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