Macro Monitor

Despite the mechanical “Lower Risk” signal, we are clearly in a risk-off environment. We recommend a defensive stance towards credits at this point.

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We are downgrading U.S. Investment Grade bonds to Neutral in light of the risk-off environment.

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At this point, the worst outcome for the risk markets would be no hike in December.

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Fewer uncertainties surrounding the Fed’s policy decision probably helped, but the renewed sell-off in oil is a big concern for all credit classes. We recommend caution and a neutral stance towards credits at this juncture.

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We believe higher quality Corporate bonds should be able to weather the higher volatility expected from a rate hike and oil sell-off. Maintain Favorable.

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Our interpretation of the current Fed stance is that it has shifted from “hike if the data and the market support” to “hike unless the data and the market perform poorly.”

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Based on the four key features of the current macro environment: global disinflation, monetary conditions divergence, an extended bull market, and sub-par economic performance, 1998 ticks all the boxes.

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We are moving to a more constructive stance towards credits within the Fixed Income space.

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We think higher Quality Corporate bonds offer a better reward/risk profile now.

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There are three Ds that are ruining the Fed’s little rate hike plan: the Dollar, Disinflation, and the Decline in wealth effect.

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It’s too early to move back into credits; we recommend a defensive stance within the Fixed Income space.

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Despite more attractive value now, we expect volatility and near term headwinds to persist.

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1) Why The Big Sell-Off In Stocks? 2) Why Didn’t Interest Rates Go Lower? 3) Why Was The Dollar Weaker?

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We expect volatility to persist in the near term as the market deals with uncertainties surrounding the Fed rate hike decision and China. A defensive stance is recommended within the fixed income space.

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The overall widening trend in the last year has not shown any sign of reversing. 

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Re-deflation is the period where reflation gives way to deflation or disinflation. It has been so prevalent that it triggered a new “Higher Risk” signal in our Risk Aversion Index.

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The re-deflation theme has been so prevalent that it triggered a new “Higher Risk” signal in our Risk Aversion Index. There are significant negative implications for all risky assets.

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We would like to see a stabilization in oil prices before we turn favorable to Corporate credits. For now, we maintain a Neutral view on these bonds.

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The U.S. 10-year yield looks ready to re-test the ceiling of the previous downtrend...The recent weakness in oil prices brought back some very unpleasant memories from 2014. Implications for breakeven rates and credits are not so sanguine...We are at a crossroads and a cautious stance is warranted.

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Divergences have emerged: countries on a tightening path (e.g. US and UK) were more or less on track until June; while countries on an easing path (e.g. Germany, Japan, & Australia) went off script, as policy trumped historical patterns.

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