The world holds its breath

Global central banks have begun cutting rates – but the chief market determinant is sure to be (another) generationally consequential US election.

At the time of writing, markets are enjoying a powerful mix of US monetary policy easing and now Chinese policy stimulus. Their reaction to these crucial events is helping us build a picture of the potential shape of the next economic cycle.

As the US Federal Reserve (Fed) finally switches its focus from inflation to employment, markets have been quick to price in a bout of aggressive policy easing.

The case for owning duration now is that it offers good insurance value as long as the ‘disinflation’ story remains intact. If investors find it hard to get concerned about the risks of resumed high inflation, the correlation between risk-free and risky assets should be negative (in other words, helpful). As a result, we have continued to run unconstrained fixed income funds long on duration and long in credit.