• Hopes of a soft landing for the economy, spurred by the Federal Reserve, buoyed markets in January. However, in March, problems began to emerge in the banking system. While these problems could slow the rise in interest rates, "friendly" monetary policy is less likely to support markets if financial conditions tighten.
• The challenge for the market remains to balance the hope for a "soft landing" without much impact on corporate earnings, employment or credit, while expecting inflation to come down quickly.while at the same time expecting inflation to come down quickly.
• Our base case remains that the debt ceiling is eventually lifted/suspended, although a deal is likely to be reached only at the last minute and lead to greater market volatility than currently discounted.
• There remains a divergence between rate markets expecting the Fed to cut this year, equity markets interpreting those potential cuts as risk positive, and the Fed's more hawkish rhetoric. This gap is likely to close at the expense of equities, as rate cuts would only occur in a risk-averse environment, and if rates remain higher, they should affect equity multiples and economic activity.
• With growth weak and risks tilted to the downside, our main recommendation remains to overweight fixed income.
• Interest rates at the short/mid end of the sovereign and IG debt curve are attractive compared to history.. We remain neutral on duration (around 4 years).
• The risk-return trade-off for equities is low given recession risks, stretched valuations, high interest rates and tighter liquidity,
• The strong year-to-date performance of U.S. passive equity indexes is masking rising risks. While the bear market rally from October to January was a recalibration of cap rates and tightening policy, the price action over the past four months has been extremely narrow, with most of the gains coming from a handful of large-cap technology companies, many of them tied to AI.
• A more balanced overall exposure and active management is recommended to address the concentration risk of passive indexes.
• Fundamentals at the margin have improved for the dollar. Much of the dollar's decline since 4Q22 has to do with the idea of a more dovish Fed than the rest and a weaker US economy than the rest. Well, that is not so evident, at least recently. Economic data have been worse than expected in Europe than in the US, which can also be explained by a certain loss of strength in the process of reopening the Chinese economy.
• Doubts about the strength of China's economic reopening weigh on commodity demand. Industrial metals are affected by weakness in China's housing market.

For more details, you can access the full report here..

Humberto Mora

Assistant Investment Manager Finance and Business Finance and Business Brokerage Firm