Alex Bellefleur – Market Outlook
Alex Bellefleur, new Chief Economist and Strategist for the Multi-Asset Strategies Team, discusses opportunities and potential risks in the market.
So some of the opportunities that we see in the global markets right now have mainly to do with how the shake-up that is taking place in global bond markets impact other asset classes such as currencies.
So, again, one thing we’ve seen recently is a significant increase in bond yields in the United States. In our view, the Multi-Asset Strategies Team, we think that this shouldn’t be under-appreciated by investors because it’s very significant. When we look at why the bond yields have risen in the United States, it hasn’t really been inflation expectations that’s been driving the bond market recently; it’s been mostly real yields. So that is expectations with respect to growth and expectations with respect to Federal Reserve tightening going forward.
In our tactical positioning, the Multi-Asset Strategies Team, we believe that this move has a little bit longer to go. So we’re still under-weight fixed income assets at this point.
Now, another opportunity that stems from this, we think, is in the currency markets and more specifically with respect to the euro. Our tactical positioning on the euro right now is under-weight so we expect weakness in the euro relative to the U.S. and the Canadian dollar because we believe that the kind of tightening that is now taking place with the Federal Reserve will not be replicated in the European Central Bank for a variety of cyclical and structural reasons, but mostly because we don’t believe that the ECB will be in a position to do the same thing that the Fed has accomplished in the United States, which is to normalize interest rates. So for this reason, another opportunity that we see lies in anticipating a weaker euro going forward.
So some of the potential risks that we identify over the next few months for global markets, I think, broadly speaking, would be in one of three categories at this point. So the first one has to do not necessarily with politics but definitely with policy, and here specifically, I would identify global trade tensions as a pretty significant risk for global markets going forward.
We’ve all seen the bilateral relationship between the United States and China deteriorate recently with trade being in focus, and this is something that has to be monitored very closely because negative developments in terms of global trade have the potential to slow down global trade growth and therefore global economic growth, but also to increase costs for businesses and consumers around the world. Which is a pretty significant risk that central banks would then have to respond to. So that is the first one I would say.
The second one I would say has to do with how the U.S. economy responds to some of the interest rate increases that we’ve seen recently. So far, things have been going pretty well but there are some interest-rate-sensitive sectors in the U.S. economy which are going to feel a certain amount of pain from higher interest rates going forward. The Fed is trying to engineer a soft landing but we have to keep monitoring to make sure that this actually happens going forward.
And thirdly and lastly, I would say one of the other important risks that we see going forward has to do with the Eurozone and some of the internal developments in Europe. So, for example, the relationship between Italy and the euro area authorities has become a little bit more strained recently with the election of a populist euro-skeptic government in Italy wanting to run a bigger budget deficit, which is a problem from Brussels’s point of view. This is something that can represent a certain amount of risk for the Eurozone going forward and it has to be monitored as well.