Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
Singapore CEO
Summary: Pay close attention to the Fed voter dynamics as this could have nearly as big an impact on the markets as the US-China trade tussle and US twin deficits.
After a long period in which increased flattening of the US yield curve drove predictions for a recession in 2019 when inversion becomes reality, the presumed inevitability of this flattening is now attracting more scrutiny. One can argue that the relative insulation from trade war ill-effects of US growth outperformance, rising wages and US corporate earnings is driving the markets to a pivotal point…or is it?
It is almost universally accepted that future Treasury issuances will expand in size (indeed, $230bn worth are up for auction this week) to fund the ballooning US budgets on the back of the Trump administration’s tax cuts. Until recently, the yield curve continued to flatten as the Fed’s rate hikes were read as the inevitable action of a central bank trying to inch closer to neutral territory while retaining a little ammunition for a sustainable rise in long end yields in the wake of still-tepid wage growth and a likely escalation of budget and trade deficits. But are we at a point where we must reprice the possibility of some sort of equilibrium being re-established in the tenure premium in the Treasury markets?
US 10yr-2yr spread