A just-published report updated our views on the outlook for the major global financial markets. Risk asset prices are now discounting a recession, even though underlying economic momentum and forward-looking gauges are still generally positive.
Three necessary ingredients to end the current risk-off environment are: a consolidation in government bond yields; a reversal in the commodity price runup; and a rollover in inflation expectations. There is tentative evidence that all three are occurring. For a sustained risk-on phase to develop, however, the major developed central banks will also need to become less hawkish and investor recession fears will need to subside, which are not yet in place.
Nonetheless, we tactically added some beta exposure to the MRB TradeBook on the likelihood that such changes will occur and risk asset prices may be near a bottom. We recommend tight stops to protect against the risk of another wave of selling pressure given current extremely pessimistic market sentiment.