Market Compass July 2024

Highlights:

• The economic story of moderate growth and disinflation conflicts with political gridlocks. A Trump victory would fan international trade tensions, while political troubles in Europe are not limited to just France.
• The global recovery appears slightly more entrenched. We are confident that inflation normalization is proceeding again, making rate cuts more likely.
• Political developments often support our long-standing preference for Investment Grade (IG) Credit over Govies. But we try to avoid falling into the excessive influence of political crises, often the cause of temporary spikes. The French election may be a buying opportunity for French government bonds (OATs), unless a fully split parliament causes stalemate and makes fiscal consolidation impossible.
• Until the political fog lifts, we keep our equity overweight (OW) minimal, and High Yield and Financial Credit neutral. We stay long non-financial IG credit. We like to play the range in rates, still with a long duration bias. EMs offer good diversification benefit (both in Equities and HY Credit), despite near-term dollar strength.

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