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Fed rate cut expectations have been delayed and dampened since early 2024, because of resilient US growth overlaid with sticky inflation. But the US slowdown may now be in sight which is still aligned with a soft-landing scenario. We expect the Fed to cut rates in 2H2024, but the uncertain downward path of inflation will keep it in a wait-and-see mode until Sep FOMC even as other major central banks have started to ease policy.
We remain Overweight on equities in our asset allocation due to supportive earnings and peak rates cycle. We prefer to remain neutral to our bond allocation amid firm Treasury yields on the back of US economic resilience. Cash remains an Underweight as the benign macro backdrop remains supportive for risk assets and allocation to alternatives remains an Overweight too as less correlated alternatives offer benefits of diversification.
While we recommend an increase in the allocation to equities, we remain underweight to US equities on the back of corrective forces despite the cyclical bull market. We have upgraded our allocation to European equities to overweight amid an industrial investment cycle. We maintain an overweight on Japan’s equities while Asia’s equity exposure remains neutral, as we are cautiously optimistic on China’s turnaround while preferring South Korea, India, and ASEAN.
For Developed Markets (DM), we remain Overweight on DM USD IG as credit spreads are holding up while all-in yields remain attractive. We stay Underweight on DM HY as we remain cautious of the asymmetric risk-reward. We maintain Overweight EM Asia IG as fundamentals remain resilient with coupon carry in focus. We are Neutral on EM Asia HY as avoiding credit pitfall will be of utmost importance.
We can expect gold to be propelled higher in the months ahead by renewed ETF buying, once the Fed starts its anticipated rate cuts from Sep 2024. Overall, we maintain our positive outlook for gold and continue to raise our forecast higher to USD 2,400 / oz by 3Q24, 2,500 / oz by 4Q24 and 2,600 / oz by 1Q25 and 2,700 / oz by 2Q25. In line with the nascent signs of growth stabilization in China, we raise our LME Copper forecast to USD 9,000 / MT for 2H24 and USD 10,000 / MT for 1H25. We keep to our view Brent crude oil while consolidating around the USD 80 / bbl level, needs to reflect some form of geopolitical risk premium, and therefore keep our positive forecast of Brent crude oil for USD 85 / bbl for 3Q and 4Q24.
Overall, we kept to our existing view that Fed will start gradual rate cuts from Sep. As such, we continue to see USD weakness towards the end of the year. Our rates outlook stays unchanged as well and we continue to see gradual pullback in rates. We expect 3M compounded in arrears Sofr at 4.97% and 10Y UST at 4.10 by 4Q24.
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