Recovery, not reflation

Highlights:

• We expect the combination of a mild global recovery and a continued disinflation trend to persist into the summer. The ECB is set deliver its first rate cut in June, with the Fed likely to follow in September
• This backdrop tilts the outlook for core yields mildly to the downside. Solid earnings and the outlook of lower rates may keep risk sentiment underpinned.
• That said, an advanced equity rally, depressed volatility and elevated investor positioning in risk assets reflect a very high degree of market optimism that keeps the risk of temporary setbacks high.
• We maintain a neutral stance on Equities and HY Credit and concentrate our tactical overweights in the safer buckets of risk assets, including IG Credit and Southern European debt, at the expense of Cash and short-dated core bonds. We keep a moderate long duration stance across Fixed Income classes.

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