In his latest weekly insight, Mark Dowding, BlueBay CIO, RBC BlueBay Asset Management. In this edition, looks at the outlook for the US, Europe, Japan, and trade.
Short dollar stance
RBC BlueBay has noted increased client enquiry around euro strategies over recent weeks, on a thematic that investors are looking to diversify away from the dollar and US assets. RBC BlueBay thinks that structural allocation away from the US dollar is a theme that could play out over a number of months and quarters to come. On this basis, the firm looks for opportunities to add to an existing modest short dollar stance, on any short-term, counter-trend rally by the greenback. In this context, RBC BlueBay would eye opportunities to buy the euro below $1.13.
Fed cut
RBC BlueBay senses the FOMC (Federal Open Market Committee) will remain very wary of political interference in monetary policy decisions. Unless unemployment jumps to 4.5% in the next couple of months, RBC BlueBay thinks policy is likely to remain on hold over the months ahead. There is an argument that if any move up in inflation can be contained, there could be a case for the Fed to cut in September and this seems to be what the White House is hoping for.
European CLOs
Investment grade corporate demand has remained robust, with solid demand in evidence for new issues. This has created a strong technical dynamic for the time being, which we have also seen in higher yielding parts of the credit market. In this light, RBC BlueBay were struck to record that there are currently about 150 open warehouses for Euro CLOs (collateralised loan obligations). This figure is up materially from the run rate of around 80-90 seen in the past few years. In part, if Japanese investors are happy to own AAA-rated CLO tranches in euro transactions, shifting some of their allocation away from the US market could be a dynamic that supports loan spreads in the region, over the next several months.
Japan
In Japan, the Ministry of Finance has communicated plans to reduce long-dated bond issuance by 10%. RBC BlueBay had hoped that the MoF would be more decisive in curbing long-dated supply, at a time when super long JGBs (Japanese Government bonds) have been under considerable pressure. RBC BlueBay is confident that 10/30 spreads above 150 basis points are materially too wide and look for this to correct over the medium term. However, it may be that the firm needs to stay patient on this trade and there could be a risk in the short term if other investors become frustrated that the MoF is not showing sufficient market understanding and flexibility.
Tariff deadline
No progress has been made in cementing additional trade deals and in speaking with the US administration it seems there is an expectation that the July 9 deadline will be rolled for all countries which have shown a willingness to advance a trade agreement with the US. That said, RBC BlueBay remains wary of the potential for sector-based tariffs on pharma and think that it is unlikely that the July 9 date will pass without some volatility impacting markets. RBC BlueBay expects EU tariffs on the US in retaliation and has also been interested to note EU tariffs on Chinese imports, which have been taking effect.
