The ebb and flow of US market interest rates, inflation expectations and the future level of policy rates are currently the main drivers for asset returns around the world.
US market rates have risen further, as has the market’s forecast for the future level of the fed funds rate. Inflation expectations have also continued to advance.
The effects were seen in bond markets, both in the US and in emerging markets, while the relative performance of value stocks versus growth stocks was also impacted.
Eurozone government bond yields, however, have retraced part of the February sell-off thanks to a more assertive ECB.
What is next? We do not expect a significant increase in inflation expectations, but high inflation numbers this summer could still spook the markets and lead to a bigger sell-off. However, if the Federal Reserve continues to stand pat firmly, expected policy rates and real yields might ease back.
We are cautious about the outlook for rates and prefer assets that can benefit from reflation.
This month, we reduced our short position in euro sovereign bonds, while increasing our allocation to US, Japan and China equities. We are now overweight commodities again, but have trimmed our tactical overweight in gold. We are now long the Australian dollar.
Watch the video with Daniel Morris, chief market strategist