Latest from BCA Research

It takes time for wage inflation to die. So, if 2022 was the year that central banks’ monster tightening killed bond and stock market valuations, then 2023 will be the year that it finally reaches the economy and kills profits, jobs, and the wage inflation that has so far refused to die. This means that commodity prices have substantial further downside, while healthcare relative performance has substantial further upside.

Financials stocks have been on the radar of equity investors as central banks around the work grapple with rising inflation. Higher interest rates are usually a boon for stocks in the sector, which year-to-date, has helped Financials marginally outperform on a relative basis. However, returns are still negative on an absolute basis due to systemic risk in the markets caused by the underlying economic conditions.

The 20th Communist Party Congress concluded on Sunday with President Xi Jinping cementing his third term in office. We are maintaining our cautious stance on Chinese stocks and the exchange rate. The lack of a significant shift away from current macro and regulatory policies means that China’s economic recovery and stock performance remain at risk.

This week’s report takes a look at risk-adjusted return opportunities in US spread product.

The midterm election will bring some relief from US policy uncertainty. But this relief will be short-lived unless Republicans win the Senate, which is still too close to call. Global policy uncertainty and geopolitical risk will remain high.

On their third quarter earnings calls, the largest banks indicated that their household and business customers remain in surprisingly robust shape. We interpret their observations as supporting our constructive near-term take on the economy and financial markets.

Bank Credit Analyst

Who will win the 2022 World Cup in Qatar? What are the important narratives around the teams? And how have major macro trends affected the world of football? Find out in the 2nd edition of the BCA FIFA World Cup Forecasts.

Is a Plaza Accord 2.0 necessary? If so, why? If not, what could stem the rise in the dollar, or will it continue to overshoot? In our view, there are fundamental reasons not to bet on a new accord, but that does not necessarily help with investment strategy.

Special Report

The Fed’s asset sales are unlikely to lead to an additional outsized impact on long-maturity government bond yields beyond what expectations for the path of the fed funds rate would justify. However, the stance of monetary policy has tightened substantially over the past year, and is set to tighten even further over the coming several months. As such, investors should be focused less on the ostensibly unknown risk from the Fed’s balance sheet reductions and more on the known risk of conventional policy tightening, which is currently quite acute.

Monetary and energy policy errors will keep oil- and gas-price volatility elevated. This will continue to weaken capex in conventional and renewable energy. Headline inflation will remain elevated. We remain long the XOP ETF, to retain exposure to the equities of oil and gas producers, which will benefit from these policy errors.