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Trade Floor Update: Currency and Bond Markets

Gene Frieda considers recent moves in global currency and bond markets, in particular the U.S. dollar and yield curve, and what we expect going forward.

In this month’s Trade Floor Update, we asked Gene Frieda, a global strategist based in our London office, several top-of-mind questions for investors, including whether the U.S. dollar will continue on its current path and if the end of the bond bull market is at hand. Watch the full video or read the transcript below, edited for length and clarity. The recording was filmed on Thursday 1 February 2018.


Q: How have markets started 2018?

A: The markets have started on a very strong note. It's been one of the strongest equity market performances since the mid-1990s and we think the drivers are threefold. First, strong global synchronized growth. Second, the tailwind of U.S. tax reform. And finally, one of the most rapid depreciations of the U.S. dollar in 35 years.

Q: Will the U.S. dollar continue to weaken?

A: Our base case is that the dollar does, in fact, continue to depreciate, albeit at a slower pace than what we've seen at the start of the year. The expectation would be that dollar depreciation exports loose U.S. financial conditions to the rest of the world, which is very supportive for risky assets and particularly for emerging markets. It slows the pace of monetary policy normalization outside the U.S., and it also serves to increase commodity prices.

Q: What’s driving global bond markets?

A: Reflation has generated enthusiasm that inflation is finally going back or will go back to normal levels. As a result, inflation linked bonds have begun to reprice, mainly driven by a decline in the dollar and higher energy prices. We've also started to see yield curves steepen as markets have become more optimistic about the sustainability of global growth over time.

Q: Are we entering a bear market in bonds?

A: The honest answer is we don't know if this is the start of a bear market. Our expectation is that bond yields are due to reprice for cyclical reasons. As a result, we're running an underweight in core duration. What we would say is that we don't feel like we're in a new regime as far as real yields go and that the rise in bond yields, thus far, has been quite orderly. That's not normally the recipe for a bear market in bonds.

Q: Is central bank policy a risk to this outlook?

A: Our expectation is that after a robust period of growth in 2017 and 2018, growth starts to slow towards more normal levels in 2019. But in the interim, the question is whether or not central banks embrace this enthusiasm and start to move more rapidly to normalize monetary policy. In that event, we would expect a more material repricing of bond markets. But our central expectation is that most central banks outside the U.S. move very gradually in the face of low inflation and appreciating currencies against the dollar.

Q: Where are the opportunities in credit?

A: We feel strong global synchronized growth is very supportive for credit risk assets, but we feel much of this outlook is already priced into markets. As a result, we feel we need to look more towards non-traditional parts of the credit spectrum, like securitized products, where we can harvest a liquidity or complexity risk premium. We're also looking for non-traditional sources of carry outside traditional credit in places like emerging market currencies, which remain undervalued.

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Gene Frieda

Global Strategist

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