He's been behind this recent bout of risk aversion.
I think it's a macro overlay. I think the markets are very much
focused on some of the earnings story, but possibly overlooking the weight of
economic deceleration that is playing through right now, particularly in the
United States. I know the S&P is up some 6, 7, 8
percent year to date. It's pricing in a soft landing.
It's pricing in a pivot. It's pricing in a sharp deceleration in
CPI. But really, that's not our base case at
all. I think it's much more likely that we
see some kind of European recession, a couple of quarters of negative growth.
I don't think that it's going to play through until the first quarter of next
year. And it seems that core CPI is proving a
lot more sticky than perhaps originally anticipated.
So I think that the that the macro overlay is probably dominating the
performance of equities, particularly in China.
In our view, China is much more of an onshore story.
It's much more of a retail story driven also by money market funds, mutual
funds. And we're seeing evidence of that bit in
play, but away from the onshore domestic story.
The I think the the global appetite for equities is diminishing.
I'm looking at a whole range of technical signals which seem to be
suggesting a risk off environment and actually is one of the reasons why we as
a house have been underweight equities now for a number of months, essentially
anticipating this this more worrisome backdrop into the second half of the
year. It makes me wonder, we last year seem
like everyone talks about, you know, it's not going as bad as 2020 to where
everything was basically coming down. This year, though, I feel like it's more
fits and starts where it becomes much more volatile and where people start to
think that things are rallying and things are looking and turning the
corner. And then we have doubts about it,
whether it's China, whether it's the Fed, the like geopolitics.
Yeah, well, the Fed, I think has been reasonably consistent in suggesting that
it will keep rates higher for longer. But the market's not necessarily into
that story. The market's always anticipating
something of a pivot. And indeed, if you look at Fed Fund
futures, which I did just before they came out, the market is still hoping for
something of a cut in July. In our mind, that's far, far too soon,
given where core is right now in this very sticky effect of raising wages on
on services raised rates next week and then they cut them in July, that would
look like a policy mistake. So they wouldn't do it.
But I wouldn't get a sense of how you you look at the very sectors and Bank
Street here as well, and some have called it duty cubed with the way that
the loans are now being judiciously given out.
And a lot of the, of course, regional banks and under pressure we've been
hearing from First Republic and others as well as the the big ones benefit from
what's been going on in the deposit outflows.
Well, absolutely, Richard. And there's probably another dynamic as
well at work there in that in many respects, the Fed has been battling
against a reasonably robust household balance sheets, reasonably robust cash
positions amongst corporates, and, of course, that very low unemployment rate.
And they've been raising rates pretty aggressively, if not one of the sharpest
tightening cycles I've seen in 20, 30 years.
And the interest rates have had yet to have a meaningful effect.
I mean, we'll have Q1 GDP, as you suggested, tomorrow.
I suspect that we'll see Q1 coming in about one point nine percent.
That's still pretty high. So the point I wanted to make was that
the credit tightening actually will improve the efficacy.
We yes, the finances due higher rates and this is likely to bite a little more
meaningfully into the second half of the year,
essentially super charging, if you will, that deceleration, that total monetary
policy and essentially getting unemployment up to a level and inflation
down to a level where I think it's consistent with
with interest rates.