MacroResearchBoard

Unwinding A Huge Distortion – March 28, 2022

A just-published report updated our MRB TradeBook absolute return positions, including a number of new trades. While there is still considerable near-run global economic uncertainty, the 6-12 month view is still upbeat as COVID headwinds are fading and it appears that the negative economic contagion from the Russia-Ukraine war may prove limited. Meanwhile, the inflation outlook continues to deteriorate, forcing a further pivot by central banks, including yet another shift by Fed chair Powell last week.

Monetary policy in the developed market economies has massively distorted policy rates and bond yields. And, despite the recent rebound in bond yields, nominal and real yields are still extremely depressed at a time when economic growth and inflation are running hot. Central banks will face persistent pressure to normalize policies in the coming year and beyond, thereby keeping upward pressure on bond yields.

Nevertheless, the report warned against remaining too bearish on pro-growth assets. We favor assets that benefit the most from the economic reopening, especially U.S. and euro area financial stocks. Moreover, we continue to bet on lower oil prices: our recent short energy-related positions (in both equity and fixed-income markets) are starting to pay off, and the history of past blowoff phases warns that crude prices could have substantial further downside.