Economic backdrop offsets ongoing political uncertainty, supporting risky assets despite lofty valuations
The current economic back drop remains very supportive of risky assets globally. Global PMI prints point to continued improvement in growth, and financial conditions remain supportive.
All inflation prints continue to point to rising inflation pressure.
The markets continue to focus on European political risk, with European asset prices still underperforming. Net euro government bond issuance shifts to positive in March, which is likely to put pressure on euro government yields.
While equity markets continue to break new highs, all our key risk indicators point to the fact that risky assets have rallied too far and too fast in recent weeks, pointing to an unsustainable over-exuberance. Overall position:
Expect European risk premia to rise further going into elections, and expect further yield pressure on core/semi core and peripheral bonds.
We remain bullish USD: investors have unwound their long positions, the market is underpricing the Fed, in our view, and upcoming US tax changes should be supportive.
Bond yields do not currently reflect the rise in inflation pressure.
In spite of strong inflows into US equities and EM, risk appetite appears unsustainably bullish.
Implied volatility remains at low levels, driven by very low realised vol causing vol premia to continue to be positive – ‘puts’ in equities look historically cheap.
