by Marko Kolanovic, PhD, J.P. Morgan
Highlights
Cross-Asset Strategy: Our outlook remains positive for risky asset classes, with expectations for Equities and Commodities to have the highest return, and bond yields to continue their move higher. This pro-risk view is driven by the ongoing recovery from the pandemic (starting in the US and continuing in Europe, and e.g. exemplified by the latest reading of JPMās Global All-Industry PMI at 15-year highs), accommodative monetary stance from global central banks, and still below-average positioning in risky asset classes such as equities and commodities.
Earnings growth should remain above trend in 2H, supported by consumers and capex. As inflation, reflation, and reopening remain in the focus of investors, we expect a continuation of rotation from defensive into cyclical assets. We also expect commodities to continue outperforming driven by energy, and in equities we expect rotation to continue from bond proxies and growth into value. This positive outlook should last at least during the summer months (peak reopening), but potentially well into 2022 as global economies recover from the pandemic.
JPM Clientsā View: Click here to take our markets survey. It is equally, if not more important to understand the views of JPMās institutional clients, as well as those of our Strategy teams. This will be accomplished by a new survey section. Each week, we will ask a set of running questions on risk positioning and a set of questions on topics clients found most relevant that week. Readers can fill in the brief survey by clicking the link above, and we will upload results at the end of the next day. The running survey questions assess investorsā equity positioning/ sentiment and intentions for near-term changes to equity allocation and bond duration. This weekās topical survey questions inquire about perceptions around risk/reward between equities and bonds, inflation hedging, and equity regional preferences.
Inflation surprises are likely to persist into the second half of the year: In our opinion, inflation risks are underappreciated by both economists and markets at the moment. At an asset class level, the inflation theme does not only favor an OW in commodities and equities, but also an UW in credit. We thus trim further the credit allocation in our model portfolio. Within equities, we keep a tilt towards value oriented regions. In rates, we retain bearish duration exposures expressed via more carry-efficient steepeners. In credit, we add hedges against inflation and systemic risk, while maintaining some exposure to earning carry. In commodities, we have an OW in energy funded by an UW in precious metals as the latter is exposed to higher real yields.
New Trades: Bought FTSEMIB call options (Silvestrini); updated US Equity analysts top picks (Rosato); entered USDRUB 1x1 call spreads (Shal); option ideas on forthcoming risk events (Ravagli); bought puts in Tech stocks triggering negative momentum signals (Quigg); entered tactical GBP/USD longs (Meggyesi). Catalysts this week: ZEW (Jun 8th); BoC & China PPI/CPI (Jun 9th); ECB &
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