Investors are coming to terms with the fact that central banks could be moving a little higher but for sure holding the rates higher for a lot longer. In our view, what that means for stocks will very much depend on how policy lags play out and whether a soft recession hits with the unemployment rate starting to rise in the summer. If that scenario forces the Fed's hand to ease and AI continues to be the thing, investors will substantially trim money market fund holdings and flip them into AI and shovel providers. Either way, we could have a bullish AI-driven fear of missing out on summer, and this momentum could morph into the new go-to style for investors.
China's local government indebtedness is again becoming a primary focus for investors, with concerns centred on Local Government Financing Vehicles (LGFVs). The most recent bout of market concerns was sparked by a report that two bondholders of a Kunming LGFV received payment after business hours on May 22. Since no China LGFVs have, thus far, defaulted on their bond obligations, there are worries that a public bond default could have a contagion impact, which in turn could lead to a broader credit crunch.
That said, the 20% rally in Japan off January lows and India's ascendency suggest that despite sluggishness in China, you cannot forsake other ASEAN markets.
On FX, as we mentioned early this week, FX traders would focus on G-10 minors like CAD and AUD and that the EURO was getting boring to short.
The Australian and Canadian dollars are now the two top-performing G10 currencies on a month-to-date basis, with the Bank of Canada joining the RBA in hiking this week, with markets having expected another pause from both triggered lift-off on both currencies.
The Euro is a bit higher as the market is voting for 2 more hikes from the ECB and only pricing a 50 % chance of a July Fed hike (last checked). Not to mention when you can’t push something lower in FX, there’s a good chance it goes higher.
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