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Now that the US Federal Reserve (Fed) has finally started its eagerly awaited monetary easing cycle with an outsized 50bps cut, the US Treasury yield curve can be expected to steepen anew but we remain concerned about the growing long-term risk of runaway US fiscal debt. As for Japan, BOJ remains poised for more rate hikes after volatility subsides. Despite China’s barrage of stimulus announced, it remains uncertain whether it can reinvigorate China’s weak economic sentiment.
We remain overweight on Equities in our asset allocation due to supportive earnings against a backdrop of falling interest rates. We maintain neutral on Fixed Income following strong Treasury returns. We stay overweight on Alternatives as less correlated alternatives offer diversification benefits. Cash remains an underweight as the benign macro backdrop remains supportive for risk assets.
We remain underweight on the US as we are tactically cautious on near-term corrective risks heading into the presidential elections. We downgrade Europe to neutral from overweight as the region is mired in weak domestic consumption and softening manufacturing activity. We maintain our overweight on Japan as its medium-term story is underpinned by corporate reforms and the end of deflation. We upgrade EM Asia to overweight and stay cautiously optimistic on China following stimulus measures as more reflationary measures are required.
For Developed Markets (DM), we stay overweight on DM IG as quality premia remains a key focus. We stay underweight on DM HY as risk-reward is asymmetric but further credit spread tightening is plausible. We stay overweight Emerging Markets (EM) IG and emphasize coupon carry via credits with resilient fundamentals. We are Neutral on EM HY and selectivity is key in avoiding credit pitfalls.
We stay positive on gold due to the start of eagerly anticipated Fed rate cutting cycle, upcoming further weakness in USD and lower rates, likely return of investor demand to gold backed investments like ETFs, jump in gold import demand from India and on-going strong central bank allocation into gold. We raise our gold forecast to USD 3,000 / oz by 3Q25. In comparison, we see crude oil and copper feel the weight of China’s economic slowdown.
Fed’s rate expectations will continue to be the predominant driver for the broad USD trend just as Fed takes leadership in this easing cycle. Even after wiping out the very substantial year-to-date gains, the path of least resistance for the DXY from here is likely still skewed to the downside. In terms of front-end rates, for end 4Q24, we forecast the 3M compounded in arrears Sofr and Sora at 4.88% and 3.06% respectively. Thereafter, short term rates are then expected to drift lower across 2025 in tune with our expectations of a further 100 bps rate cuts from the Fed.
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