Cross Asset Investment Strategy - June 2022

The repricing of a more aggressive Fed stance has been brutal as the 10Y UST yield temporarily reached the 3% threshold, falling close to 2.75% recently on economic growth concerns. We think investors should move towards neutrality on duration in the US and Europe, whereas in credit, they should focus on quality and stay cautious on higher-risk segments in Europe. Hard currency EM bonds are showing attractive valuations. On the other hand, in equities, we like to play the resilience of US over Europe. Overall, investors should remain diversified and well-hedged, without increasing their risks.

As crises unfold, structural and governance issues tend to become more and more important. And the objectives of economic policy are increasingly ambitious, both on the fiscal and monetary fronts. The governments and the ECB are in an impossible situation. The “old rules”, be it the Taylor rule for the ECB or the rules of the Stability and Growth Pact are outdated. That said, the absence of rules can lead to increased financial and macroeconomic volatility. Only “new rules”, which have yet to be invented, will enable monetary and fiscal policy to meet the new challenges. It is up to the EU Member States to define, as a priority and in a concerted manner, the major strategic orientations.

The excellent results of the first quarter also conceal weaknesses. Excluding energy, they remain positive but much less flattering, and companies are wondering about the future. Revisions are now expected to be on the downside, which does not rule out counter-trend rallies. Markets’ behaviour could be tricky. Remain cautious.

Structural headwinds are strong for the yen, setting a fundamental background for the currency to stay weak. Yet a recessionary environment is a cyclical blessing – peaking growth and rates prove that the JPY is among the cleanest diversifiers – and officials may have lost their appetite for currency devaluation.

We keep the probabilities of our central and alternative scenario unchanged versus last month but amend the narrative to take into account the evolving geopolitical situation (see Ukraine crisis tree).

Macroeconomic Picture by area and Macro and Market forecast.