Latest from BCA Research
The Fed is still on track for a June pause, even after May’s strong nonfarm payroll print.
In this report, we follow up on the upgrade to our US duration stance from last week with a review of our rates views and government bond allocations outside the US. We conclude that while we now find US Treasuries to be more attractive from a value perspective, even better value is available in euro area and UK government debt.
MacroQuant is slightly underweight equities, and overweight bonds and cash. Within the equity universe, the model favors the US, Japan, and the UK, is neutral on Europe, and underweight Emerging Markets.
The AI craze could further lift stock prices, boost capex, and delay the onset of the next recession. Looking further out, reaping the profit windfall from AI may take longer than many investors expect.
Symptoms of a liquidity trap for Chinese households are appearing. Our proprietary indicators for the marginal propensity to spend among households and enterprises continue falling. There has been a paradigm shift in Beijing’s approach to policy stimulus. Authorities will be slow to introduce large stimulus. Hence, China-related financial markets are set to fall further.
Risk assets would perform well over 12 months only if inflation falls to 2% without triggering a recession. That would be unprecedented. We recommend investors stay defensive.
The CCP is poised to roll out a re-boot of China’s economy that will focus on its comparative advantage in the processing of base metals – particularly copper – and the export of metals-intensive products like EVs. The re-boot will emphasize deeper policy coordination to revive construction, manufacturing, exports and renewed efforts to attract and retain FDI. This will be bullish for commodities – particularly conventional energy and metals – as funding flows to SOEs.
The semiconductor industry is at the epicenter of the AI frenzy, which even with all the hallmarks of a bubble, may last for months. There are also early signs of a turnaround in demand for more conventional chips. As such, it no longer pays to be underweight in the sector. But the sector is too expansive to shift our positioning to an overweight. This is not a trade to “be a hero” - we upgrade the sector positioning to neutral.
Expectations for oil demand growth through 2023-24 are way too optimistic. Until these expectations fall to -0.5-1 percent, the oil price has further downside. Plus: collapsed complexity confirms that AI is in a mania, while basic materials stocks and ZAR/EUR are rebound candidates.
