Sunday, July 17, 2016

Will Brexit Put the Bond Bull 
Out To Pasture?
BCA Research analyzes the recent bond bull market after the Brexit - will it last or not? .. "In the near term, we are not inclined to chase the post-Brexit rally because we still see a long bumpy runway of political and economic uncertainty over the coming months. We will upgrade our cyclical outlook for equities relative to bonds on an equity correction of at least 5%, in conjunction with evidence that the global earnings outlook is improving and the policy loosening that we expect comes into clearer view. The U.S. is the most expensive of the developed markets viewed through any valuation lens. The erosion of U.S. profit margins from higher labor costs, balance sheet constraints, and dollar strength coupled with the Fed’s underlying tightening bias favors cheaper markets such as the euro area, Japan, and even China where margins have scope to recover, and policy is likely to be more supportive .. While the path of least resistance for nominal yields is higher, the global output gap will take years to close; the path to higher nominal yields has to be lower yields for a long time. Thus, the best way to profit from more reflationary policies over the next two years is not by betting on higher nominal yields, but by buying inflation protection."
LINK HERE to the analysis

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