Watching Paint Dry

From the perspective of the big narratives, markets at the moment are like watching paint dry. In equities, EMs are taking a good’ol beating, but the MSCI World is no closer to breaking its range since the Q1 swoon on the back of Volmageddon. This is mainly thanks to a combination of steady tech-outperformance in the U.S, and sideways indecision in most of the major EU indices. In FX markets the dollar is bid, especially against EM currencies, but investors seem split on whether this trend will be sustained or not. Gun-to-head, I think the dollar can rally further, but as I noted last week, don’t ever place your FX bets based on what economists say. Finally in bonds, the U.S. yield curve is flattening, and despite endless discussion in financial media, we still don’t know the answer to the main question. Does the Fed care, and would an inversion stay its hand? I have discussed this several times on these pages, and the central point is simple I think. If a flattening yield curve is a problem for the Fed—and assuming that the rest of the world isn’t moving—it only has one option to reverse the trend; it has to slow down its hiking cycle, or halt it altogether. This possibility has been hotly debated in recent weeks alongside mounting evidence that the rest of the world is slowing.   

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