JP Morgan: Global Markets Strategy 04/08/2024
Stay OW commodities given inflation risks
Cross-Asset Strategy: Bonds sold off last week with generally stronger PMIs and ongoing US labor market strength. The recent yield moves, more hawkish Fed pricing, cheap valuations and more neutral positioning present a more favorable backdrop for duration longs, but in the absence of catalysts, we stay neutral outright and prefer 5s/30s steepeners. In the Euro area, the outperformance in rates came mostly on the back of weaker-than-expected inflation prints, and ECB commentary has been pointing strongly toward a June cut, so we keep strategic longs in SY Germany and hold 10s/30s Germany. US HG credit spreads hit a post-GFC tight, and we recently lowered our 24YE JULI spread forecast to 95bp, reflecting the strong technicals. In Euro Credit, we hesitate to chase the rally at these valuations, and still recommend setting hedges through iTraxx Main. We see limited upside in SMid cap equities given falling EPS growth, rich multiples and low-risk premia. Oil has upside risk from Ukraine drone strikes, as Russia could be forced to cut crude production and ban gasoline exports. USD remains resilient amid a backdrop of improving global cyclicals by virtue of strength in US data, carry and YTD highs in yields, so USD is well placed to withstand a further rise in oil prices, especially if supply-led. Euro Natural Gas prices should go lower given elevated storage levels at the end of this winter withdrawal season, and a likely significantly reduction in LNG imports this summer.
JPM Clients' View: This week we poll investors on US equities & rates, and immigration, in addition to our running sentiment questions. Our last survey results indicated: (1) equity exposure/sentiment among respondents is-55th percentile on average; (2) 30% planned to increase equity exposure, and 67% to increase bond duration near term; (3) most (61%) expect the Fed to cut rate at a quarterly frequency; (4) the median expects one 25bp BoJ hike by YE and for QT to begin in 1H25; (5) on average respondents expect gold to trade at ~ $2,170/oz at mid-year.
Stay OW commodities as protection to inflation risks: We are not out of the woods yet on inflation, and the current backdrop of above-trend growth raises the risk that inflation will re-emerge as a problem for both central banks and markets. The recent rise in oil prices (with risks we could see $100/bbl on Russian production cuts) is hitting the global economy at the same time as shipping disruptions and stronger demand put upward pressure on goods prices. Stay OW commodities, focused on Energy.
New Trades: Long US HG cash versus CDX.IG Junior Mezz (Doctor); initiate EUR/ SEK put spread, USD/CHF call spread (Chandan); cheap options to ride China's cyclical upturn (Lee).
Upcoming Catalysts: US CPI, FOMC meeting minutes (4/10); US PPI, ECB rates, China CPI/PPI (4/11); U.Mich sentiment, India CPI & IP, China trade balance & exports, Japan IP (4/12).