Global Polarization: The Hidden Face Behind Gold’s Record Highs

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Gold is now trading above $2,500 per ounce, showing signs of potentially breaking its historical highs again. Its value as a safe-haven asset shone brightly in the first weeks of August following the volatility shock experienced by the major equity markets, causing gold to rise after several downward sessions. Now that this “scare” has passed, what could continue to drive its valuation?

In the opinion of Charlotte Peuron, equity fund manager at Crédit Mutuel Asset Management, the increase in gold’s price to $2,400 per ounce has been driven by Western investors through gold ETF purchases and a more favorable financial environment for gold.

According to her outlook, given the downward trend of the dollar against other currencies and the real U.S. interest rates, the upward trend in gold is expected to continue.

“The upward trend in gold prices dates back to 2022. Three factors explain this movement: sustained demand for jewelry; investment in physical gold (coins and bars) by Asian investors; and massive purchases by central banks in emerging countries, particularly China, who wish to diversify their foreign exchange reserves and thus reduce their exposure to the U.S. dollar,” explains Peuron.

For James Luke, a commodities fund manager at Schroders, additional factors include changes in geopolitical and fiscal trends that are paving the way for sustained demand for gold, and gold miners might be poised for a significant recovery.

“Geopolitical and fiscal fragility—trends directly linked to demographic shifts and deglobalization, which, along with deglobalization, characterize the new investment paradigm that we at Schroders have dubbed the 3D Reset—combine today to forge a path toward a sustained and multifaceted global drive for gold supplies. In our view, this could trigger one of the strongest bull markets since President Nixon closed the gold window in November 1971, ending the U.S. dollar’s convertibility to gold,” he argues.

Towards a Polarized World

One of the most interesting reflections made by Luke is that the strength of gold reflects the shift towards a more polarized world. “The escalating tension between the United States and China, and the sanctions imposed on Russia following the invasion of Ukraine in 2022, have driven record gold purchases by central banks as a monetary reserve asset,” says the Schroders manager.

Currently, the $300 billion in frozen Russian reserve assets clearly demonstrate what the “weaponization” of the U.S. dollar—or in other words, the dollar’s hegemony—can truly mean. In his opinion, the massive issuance of U.S. Treasury bonds to finance endless deficits also raises questions about the sustainability of long-term debt. Furthermore, he notes that central banks—China, Singapore, and Poland, the largest in 2023—have been paying attention, although record purchases have only increased the share of gold in total reserves from 12.9% at the end of 2021 to 15.3% at the end of 2023.

“From a long-term perspective, central bank purchases clearly reflect the evolution of global geopolitical and monetary/fiscal dynamics. Between 1989 and 2007, Western central banks sold as much gold as they practically could, as after 1999 they were limited by gold agreements that central banks reached to maintain order in sales.

In that post-Berlin Wall and Soviet Union world, where U.S.-led liberal democracy was on the rise, globalization was accelerating, and U.S. debt indicators were quite quaint compared to today’s, the demonetization of gold as a reserve asset seemed entirely logical,” he explains.

However, he clarifies that the 2008 financial crisis, the introduction of quantitative easing, and emerging geopolitical tensions were enough to halt Western sales and quietly attract emerging market central banks to the gold market, averaging 400 tons annually between 2009 and 2021. According to Luke, “these are significant figures, less than 10% of annual demand, but not seismic.”

On the other hand, he warns that the more than 1,000 tons of gold—accounting for 20% of global demand—purchased by central banks in 2022 and 2023, a pace that continued in the first quarter of 2024, is potentially seismic. “It seems entirely plausible that the current tense dynamic between established and emerging powers, combined with the fiscal fragility looming not only over the reserve currency issued by the U.S. but over the entire developed economic bloc, could trigger a sustained move towards gold,” he argues.

In this context, and to put it bluntly, his main conclusion is that “the gold market is not large enough to absorb such a sustained move without prices rising significantly, especially if other global players also try to enter more or less at the same time.

Investors Remain Optimistic, but Volatility Shock Leads them to Increase Cash in Portfolios

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Despite the market correction in early August, investor optimism has not been affected. According to BofA’s monthly manager survey, 76% continue to expect a soft landing and a Fed action, now, of four or more cuts to ensure that this expectation of a soft landing is met.

However, the survey picks up that global growth expectations in the August survey fell sharply by 20% compared to July, in fact a net 47% of respondents expect a weaker global economy in the next 12 months. “Growth expectations and risk appetite declined in recent weeks due to the yen volatility shock and weak July employment data,” notes the BofA survey.

As a result, investors increased cash levels again for the second consecutive month, rising from 4.1% to 4.3%. “Our broader measure of FMS sentiment, based on cash levels, equity allocation and economic growth expectations, fell to 3.7 from 5.0 last month,” the firm notes.

As for monetary policy, 55% of investors believe that globally it is too restrictive, the highest figure since October 2008. In this regard, they point out that investors’ belief that policymakers should ease quickly is driving expectations of lower rates, which is why 59% expect lower bond yields, the third highest figure on record (after November and December 2023). Bond yield expectations are also lower, a sentiment that has been increasing month-over-month.

Coupled with monetary policy expectations is the conviction that a “soft landing” of the economy will be achieved, a conviction driven by the likelihood of lower short-term interest rates. Specifically, 93% of FMS investors expect lower short-term rates 12 months from now, the highest figure in the past 24 years.

Asset Allocation

When it comes to talking about allocation within investors’ portfolios, the survey shows that in August investors rotated into bonds and out of the equity market. “The allocation to bonds increased to 8% overweight from 9% underweight. This is the highest allocation since December 2023 and the largest monthly increase since November 2023. In contrast, the allocation to equities fell by 11%, which is the lowest allocation since January 2024 and the largest monthly decline since September 2022. Notably, in absolute terms, 31% of FMS investors said they were overweight in equities, down from 51% who said so in July.

“In August, investors increased allocation to bonds, cash and health care and reduced allocation to equities, Japan, the Eurozone and materials. Investors are more overweight in healthcare, technology, equities and the U.S., and more underweight in REITs, consumer discretionary, materials and Japan. Relative to history, investors are long bonds, utilities and healthcare and are underweight REITs, cash, energy and the Eurozone,” BofA notes.

Finally, two curious tidbits of information left by this month’s survey is that the largest regional equity allocation was to the U.S., while the allocation to Japanese equities experienced the largest one-month drop since April 2016. “As a result, global managers’ allocation to U.S. equities relative to Japanese equities increased to the highest level since November 2021,” the survey concludes.

 

Appetite for Sustainable Funds Returned During the Second Quarter of the Year

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In the second quarter of 2024, the global universe of sustainable funds—which includes open-end funds and ETFs—received $4.3 billion in inflows, compared to the $2.9 billion in outflows experienced in the first quarter of the year. Does this mean that investors are returning to sustainable funds?

“The outlook for global ESG fund flows is starting to improve. We began the year with outflows, but this has since changed, with money returning to the sector. European ESG funds have gathered more than $20 billion so far this year. Across the pond, investor appetite for ESG funds remains moderate, with continued outflows, but these were smaller than those seen in the previous two quarters,” explains Hortense Bioy, Head of Sustainability Research at Morningstar Sustainalytics.

The report indicates that calculated as net flows in relation to total assets at the beginning of a period, the organic growth rate of the global sustainable fund universe was 0.14% in the second quarter, a slight improvement from the 0.01% rate in the previous quarter. “However, the aggregate growth of sustainable funds lagged behind the broader fund universe, which with $200 billion in inflows, recorded an organic growth rate of 0.4%,” the report notes.

To put this in context, the Morningstar Global Markets Index achieved a 2.6% gain in the second quarter, while fixed-income markets, represented by the Morningstar Global Core Bond Index, fell 1.2%. “Europe represents 84% of global sustainable fund assets, and the United States maintained its status as the second-largest market. With total assets of $336 billion, it held 11% of global sustainable fund assets, reflecting the distribution observed three months ago,” the report states.

Specifically, European sustainable funds raised $11.8 billion, compared to the $8.4 billion recorded in the previous quarter. The report also noted a reduction in outflows in Japan, while sustainable funds in Asia continued to attract new net money.

Lastly, it highlights that product development continued on a downward trajectory, with only 77 new sustainable fund launches in the second quarter of 2024, “confirming the normalization of sustainable product development activity after three years of high growth during which asset managers rushed to build their sustainable fund ranges to meet the growing demand from investors,” the report indicates.

Janus Henderson Announces Acquisition of Victory Park Capital

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EBW Capital and AIS Financial form strategic alliance

Janus Henderson Group announced that it has entered into a definitive agreement to acquire a majority stake in Victory Park Capital Advisors, a global private credit manager.

With a nearly two decade-long track record of providing customized private credit solutions to both established and emerging businesses, “VPC complements Janus Henderson’s highly successful securitized credit franchise and expertise in public asset-backed securitized markets, and further expands the Company’s capabilities into the private markets for its clients”, the statement said.

VPC invests across industries, geographies, and asset classes on behalf of its long-standing institutional client base. VPC has specialized in asset-backed lending since 2010, including in small business and consumer finance, financial and hard assets, and real estate credit. Its suite of investment capabilities also includes legal finance and custom investment sourcing and management for insurance companies.

In addition, the firm offers comprehensive structured financing and capital markets solutions through its affiliate platform, Triumph Capital Markets. Since inception, VPC has invested approximately $10.3 billion across over 220 investments , and has assets under management of approximately $6.0 billion, according the firm information.

Janus Henderson expects that VPC will complement and build upon Janus Henderson’s $36.3 billion in securitized assets under management globally, the press release adds.

“As we continue to execute on our client-led strategic vision, we are pleased to expand Janus Henderson’s private credit capabilities further with Victory Park Capital. Asset-backed lending has emerged as a significant market opportunity within private credit, as clients increasingly look to diversify their private credit exposure beyond only direct lending. VPC’s investment capabilities in private credit and deep expertise in insurance align with the growing needs of our clients, further our strategic objective to diversify where we have the right, and amplify our existing strengths in securitized finance. We believe this acquisition will enable us to continue to deliver for our clients, employees, and shareholders,” said Ali Dibadj, Chief Executive Officer of Janus Henderson.

This acquisition marks another milestone in Janus Henderson’s client-led expansion of its private credit capabilities following the Company’s recent announcement that it will acquire the National Bank of Kuwait’s emerging markets private investments team, NBK Capital Partners, which is expected to close later this year, the firm says.

“We are excited to partner with Janus Henderson in VPC’s next phase of growth. This partnership is a testament to the strength of our established brand in private credit and differentiated expertise, and we believe it will enable us to scale faster, diversify our product offering, expand our distribution and geographic reach, and bolster our proprietary origination channels,” said Richard Levy, Chief Executive Officer, Chief Investment Officer, and Founder of VPC.

The acquisition consideration comprises a mix of cash and shares of Janus Henderson common stock and is expected to be neutral-to-accretive to earnings per share in 2025 and is expected to close in the fourth quarter of 2024 and is subject to customary closing conditions, including regulatory approvals.

The next phase of the AI journey will be driven by broader adoption of generative AI

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Pixabay CC0 Public Domain

Artificial Intelligence made headlines in 2023, but where is it headed now? ChatGPT and other generative AI tools have directly benefited a handful of stocks so far. According to Allianz GI, the next wave of AI advancements should expand opportunities to other companies within the ecosystem.

“This initial buildout of AI infrastructure lays the critical foundation for further disruptions as companies across various sectors leverage generative AI capabilities,” they argue.

According to Allianz GI’s latest report, the next phase of generative AI adoption and growth should benefit a broader ecosystem, including AI applications and AI-enabled industries in the coming years. “We are still in the early stages of AI infrastructure buildout and generative AI adoption. Unlike previous innovation cycles, where agile startups disrupted larger incumbents, this time, tech giants have been the initial beneficiaries. These tech giants have more resources, unique data sources, and significant infrastructure capabilities to train large language models (LLMs) and seize early opportunities with generative AI,” the manager notes.

So far, they believe that much of the outperformance in stocks has been concentrated in a select group of AI infrastructure and tech giant companies in this initial phase. Specifically, a handful of semiconductor companies whose accelerated computing chips are crucial for AI training, and major hyperscale internet and cloud providers who quickly leveraged generative AI and showed some early monetization.

“Continued developments in generative AI and large language models (LLMs) have driven much stronger demand for AI infrastructure so far, causing some supply constraints as hyperscale cloud platforms invest heavily to meet the rising demand from corporations and governments worldwide. Demand is expanding into other areas like next-generation networks, storage, and data center energy infrastructure to support the explosive growth of new AI workloads,” the report comments.

Allianz GI also observes a new wave of AI applications incorporating generative AI capabilities into their software to drive more value and automation opportunities. “Many companies in AI-enabled industries are also increasing investments in generative AI to train their own industry-specific models on proprietary data or insights to better compete and innovate in the future,” they state.

However, they warn that many of these new AI use cases are still in the pilot development phase and are not yet monetizing or contributing to earnings. They explain that, along with higher interest rates for a longer period in 2024, there has been greater dispersion in stock performance between infrastructure, software/applications, and other sectors so far this year. The market is taking a wait-and-see approach to valuing the benefits of generative AI in the broader ecosystem at this time. Allianz GI expects more clarity on the impact in the coming year as new applications and use cases emerge with each generation of better AI chips and as these AI models become smarter.

“In general, the AI innovation cycle is just beginning. The initial buildout of AI infrastructure sets the stage for more companies across various industries to leverage generative AI capabilities and catalyze the next phase of adoption and growth. In this next phase of disruption and change, there will be significant opportunities to generate alpha through active stock selection in AI applications and AI-enabled industries,” they conclude.

 

Alberto Silva (BTG Pactual Chile): “It is essential to understand the changing needs of clients and develop business in the region”

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Photo courtesyAlberto Silva, Director of Multifamily Office at BTG Pactual Chile

Today, given the economic context marked by high levels of uncertainty, wealth management has gained relevance among managers, as it allows them to maximize and preserve the value of their clients’ assets through personalized financial and investment strategies. This includes protecting wealth by mitigating risks through diversification and selecting assets resistant to fluctuations. Additionally, it focuses on ensuring sufficient resources for retirement and facilitating efficient wealth transfer to future generations. Wealth management also involves continuous adaptation to personal and market changes, always maintaining alignment with clients’ long-term goals and safely leveraging financial innovations.

Alberto Silva, a Chilean native, is the new Director of Multifamily Office at BTG Pactual Chile. With over 18 years of experience in the financial industry, he was a portfolio manager in fixed income, equity, and structured products. His transition to wealth management was driven by a desire to develop commercial and soft skills, in addition to his active management experience.

What are the biggest challenges you currently face as Director of Multifamily Office at BTG Pactual Chile?

The main challenge is to provide highly personalized and comprehensive service to high-net-worth families while maintaining a solid track record in an increasingly volatile and complex financial environment. Additionally, we face growing competition due to the emergence of advisors and small offices, along with technological advances that have intensified competition and reduced fees in the industry.

What strategies do you consider key for growth and sustainability in the asset and wealth management sector, especially in Chile?

It is essential to understand the changing needs of clients in a complex geopolitical and demographic environment. At BTG Pactual Chile, we focus on developing business in the region, leveraging local investment opportunities, and benefiting from a robust team in major financial centers worldwide.

What are the key trends in the wealth management industry?

There is a growing trend toward greater diversification of portfolios, especially with increased international exposure. The internationalization of portfolios, increased exposure to dollars, and the use of international platforms are key trends in an environment of rising uncertainty, demographic changes, and technological advancements affecting both the industry and markets. In this regard, BTG Pactual’s international platform has been crucial in providing Latin American clients access to markets in Europe and the United States.

Regarding the growth of the industry, do you think it will lean more towards separately managed accounts or collective investment vehicles?

There is room for both types of products. In our experience, institutional clients prefer separately managed accounts, while high-net-worth families tend to opt for collective investment vehicles. Throughout my experience, I have managed all kinds of assets, with a greater emphasis on fixed income strategies. At BTG Pactual, we use an open-architecture platform to invest with the best global managers, providing consistent value to our clients.

Do you allocate a certain percentage of a client’s portfolio to alternative assets, and how do these vary in terms of geographic location?

Yes, we have developed an alternative assets program with exposures ranging from 25% to 35% in products like private equity, private debt, and real estate. We have also been active in club deals, offering investments with higher returns and lower volatility, though with less liquidity. The underlying assets of these alternative investments vary geographically. Our open-architecture strategy allows us to invest with the best local and international managers, consistently identifying those who deliver high returns.

What is the biggest challenge in capital raising or client acquisition?

The biggest challenge is understanding the client’s needs to create a value proposition that combines their financial goals, expected returns, risk, liquidity, and the family’s values and legacy.

What factors do you think a client prioritizes when investing?

Clients prioritize expected returns relative to perceived risk, the efficiency and cost of investment strategies, and, increasingly, family values and the purpose of the wealth.

How is technology transforming the wealth management sector, specifically artificial intelligence?

Technology is democratizing investment opportunities through platforms and virtual assistants. Artificial intelligence facilitates rapid analysis of large volumes of information and the automation of administrative tasks, allowing us to focus on client relationships and identifying investment opportunities.

What are the most important skills a wealth management director should develop, and how do you personalize investment strategies to meet each client’s needs?

A wealth management director should develop essential skills such as analytical ability, effective communication, teamwork, and adaptability to change, especially in a volatile and challenging financial environment. To personalize a client’s investment strategies, at BTG Pactual, we have a highly qualified team both locally and internationally. In Chile, we are 12 professionals dedicated to the Multifamily business, supported by a team of 35 in the United States, Brazil, and Luxembourg, and backed by over 8,000 professionals worldwide.

Future of Wealth Management

In the next 5 to 10 years, Alberto forecasts a significant generational shift in investment decision-making. New generations are inclined toward alternative investments, venture capital, and strategies addressing technology and climate change impacts. This shift occurs in an environment of decreasing expected returns, driving a greater search for opportunities that offer both financial performance and positive social impact. The integration of advanced technology and the personalization of investment strategies will also play a crucial role in adapting to these new priorities and meeting emerging investor expectations.

Interview conducted by Emilio Veiga Gil, Executive Vice President at FlexFunds, in the context of the “Key Trends Watch” initiative by FlexFunds and Funds Society.

Neither Recession, Nor Bear Market, Nor Hard Landing: It’s Just Volatility

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Markets are recovering. In this context of calm, investment firms insist that stock market volatility is normal, even though we had become accustomed to its absence.

“The S&P 500 has retreated more than 8% since its peak on July 16, which is not unusual. In fact, we have seen 5% or more contractions occur on average three times per year since the 1930s. As for corrections of 10% or more, they have happened once a year, and indeed we are on schedule, as the last correction was in the fall of 2023,” Bank of America noted in its report yesterday.

According to the bank’s analysts, a full bear market (a drop of 20% or more), is unlikely: only 50% of the signals that historically preceded S&P 500 peaks have been triggered, compared to an average of 70% before previous market peaks. “Bear markets have historically occurred once every three to four years on average, and the last one was from January to October 2022. Despite growing recession concerns due to weaker economic data, our economists expect a soft landing, do not anticipate recession-sized rate cuts, and forecast the first cut in September,” they add.

Schroders echoes this message: sharp declines are not particularly unusual in equity markets. “In recent days, there has been a sharp sell-off in stocks, which has hit consensus and crowded trades hard. However, this should be seen in the context of exceptionally strong equity markets since October 2023 – by mid-July, the MSCI All-Country World Index had risen about 32% from its October lows – and a correction is perfectly healthy and normal,” reiterates Simon Webber, Head of Global Equities at Schroders.

Enguerrand Artaz, fund manager at La Financière de l’Echiquier (LFDE), shares this view, explaining that the correction occurred in the context of very bullish markets and large accumulations of speculative positions, including short positions on the yen. “The sudden liquidation of these positions, combined with traditionally more limited summer liquidity, likely amplified market movements,” he explains. And he adds: “The market capitulation of recent days seems particularly exacerbated, although some of the triggers should be taken seriously. Therefore, at this time, it seems important to adopt a cautious approach without overreacting to short-term movements.”

Moreover, for most asset managers, a soft landing in the U.S. remains the most plausible scenario. “Market anxiety is understandable, especially after the pace of economic growth slowed and price pressures experienced a widespread relaxation. We expect this trend to continue and its dynamics to moderate through the end of the year. This means that the risk of recession is increasing, but not to levels that concern us. It is unlikely that growth will plummet and economic fundamentals remain quite solid. Consumer and business finances appear quite healthy. Our working hypothesis remains a soft landing, with a 55% probability, and we manage a 30% probability of recession,” says Fidelity International’s Global Macroeconomics and Asset Allocation team.

“Looking at equity markets in general, we would say that investors have become more attentive to the condition of the U.S. economy and whether the Fed might be lagging in its interest rate strategy. In recent days, markets have adopted a risk-off mode, as investors worry about growth and employment. In such circumstances, areas of the market where investors’ funds are most concentrated tend to be the hardest hit,” conclude Shuntaro Takeuchi and Michael J. Oh, portfolio managers at Matthews Asia.

Central Banks’ Response

In this market event, we have seen old and new habits. Undoubtedly, “the old” is getting used to living with volatility again and “the new” is the strong intervention of central banks every time the market hiccups (a reality we have lived with for the past ten years). Evidence of the latter is that the tranquility of Asian markets has come from the Bank of Japan, whose deputy governor came out yesterday to announce that he will not raise interest rates further if markets are unstable.

According to Bloomberg, this reassured anxious investors. “The comments provided much-needed reassurance at a time when many are still worried that the yen carry trade reversal has further to go,” they note.

In the case of the Fed, the debate is whether it is taking too long to cut rates. “The problem is that in June the Fed only announced one rate cut this year. This was too aggressive and prevented it from acting quickly in July. The Fed could cut 50 basis points in September to make up for lost time. But the market is now pricing in five cuts in 2024, which is an overreaction,” explains George Brown, Senior U.S. Economist at Schroders.

Fidelity International experts expect the Fed to cut interest rates by 25 basis points in September and December. “In any case, we won’t know the severity of the risks emanating from financial markets until it’s too late, which could then justify a strong central bank response. That means we can’t rule out the possibility of more and bigger rate cuts (up to 50 bps) if financial conditions tighten further. The Fed could issue an official statement to quell the market’s most immediate concerns, stating that it is monitoring developments and ready to act if market turmoil begins to affect liquidity and monetary policy outlooks,” they argue.

According to the U.S. asset manager Muzinich & Co, it seems that the market is realizing two things. On the one hand, the Fed is behind in cutting interest rates, and the effects of its inaction this year are negatively impacting many sectors of the economy.

“Investors should expect a Fed reaction: at the time of writing, rate cut expectations stand at 50 basis points for September and November, and a 25 basis point cut in December,” they point out. Additionally, they note that “investor overexuberance and perhaps lack of attention to fundamental variables have led to excessive valuations in some sectors, especially in the stock market.”

Finally, Paolo Zanghieri, Senior Economist at Generali AM, part of the Generali Investments ecosystem, incorporates the eurozone scenario, as it was the first to publish its quarterly GDP. “Despite the persistent strength of inflation data, lower inflation expectations (based on the market) and fears of global growth have prompted a sharp revision of ECB rate cuts. At the time of writing, markets expect three more 25 basis point cuts this year (from the current 3.75%) and place the deposit rate at 2% by the end of 2025.

This pessimistic view implies a rapid return to the inflation target, something we only consider consistent with a recessionary evolution. We maintain our view of an official interest rate of 2.5% by the end of 2025,” he indicates.

Triple Event: Data Will Guide the Decisions of the Fed, BoE, and BoJ

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On Wednesday and Thursday, there will be a triple event for central banks: the US Federal Reserve (Fed), the Bank of England (BoE), and the Bank of Japan (BoJ) will hold their respective monetary policy meetings. Each institution faces its own challenges and has its messages for the market. However, they all have one thing in common: dependence on the evolution of macro data, particularly inflation.

In the case of the Fed, everything indicates that it will maintain interest rates in this upcoming meeting, which will be interpreted as preparing for a possible first cut in September. However, things are not as clear for the Bank of England (BoE), where the sentiment for a possible cut is only 50%, despite what the data suggests. Lastly, experts explain that this BoJ meeting is important because it will provide more details on the plan to reduce the asset purchase program (QT), the next step to normalize monetary policy. The main conclusion is that there will be no rate hike, as it will be a gradual process to give the market time to digest the bonds and avoid a spike in yields.

The Fed in the US

According to Christiaan Tuntono, senior economist for Asia Pacific at Allianz Global Investors, the prospect of a rate cut in the US and the rebound in demand for semiconductors and electronics, in general, are currently very favorable factors for part of the Asian economy and many local equity markets. “In this sense, we expect the Federal Reserve to keep interest rates unchanged next week but to acknowledge the improvement in US inflation, which could open the door to a rate cut by the end of the summer,” Tuntono points out.

Regarding the importance of data, Pramod Atluri, manager at Capital Group, highlights that “the US economy has largely adapted to this new interest rate environment, and I expect growth to remain above 2% in 2024.” In his opinion, this resilience shown by the US economy has led investors to adjust their expectations regarding interest rates. Although Atluri believes that the arguments for future rate cuts are no longer as evident, the central bank seems inclined towards cuts.

In this regard, the views and analysis from international managers coincide with Tuntono Atluri’s assessment. There is also a consensus in interpreting the latest macro data from the country. “Although the labor market shows clear signs of normalization and recent consumer inflation data has been relatively positive, the central bank has been encouraged by macroeconomic data several times over the past 18 months, only to later discover that the economy continued to operate at an excessive pace. Therefore, it is likely that the Fed will argue that it is prudent to observe the next six weeks of data to clearly validate the need for policy easing,” says Erik Weisman, chief economist at MFS Investment Management.

However, in his opinion, more important than what the Fed does in the next month and a half is how the market will gauge the subsequent pace of rate cuts and the eventual landing zone. “The magical soft landing of 1995 was achieved with only 75 basis points of rate cuts, and some argue that we will see a repeat of that episode in the next six months or so. However, the market expects the Fed to cut between 175 and 200 basis points before the first quarter of 2026,” estimates Weisman.

Regarding when the Fed’s first rate cut will be, managers’ analyses also point to the same timeline: September. “We believe that this week’s data, especially the 0.18% month-over-month core PCE and the signs of cooling shelter inflation, continue to reinforce our view that the first cut will occur in September. We expect a moderate hold at the Fed meeting, with Powell indicating during the press conference that a first cut is likely to happen quite soon if data continues to evolve as expected,” says Greg Wilensky, director of US Fixed Income and Portfolio Manager at Janus Henderson.

“The lower inflation rates of the past three months should pave the way for a rate cut in September. This is likely to be reflected in the meeting’s conclusions, as the Committee is expected to ensure that confidence in inflation evolving sustainably towards 2% has strengthened and emphasize that the risks to employment and inflation objectives are now balanced. Powell is likely to use his speech at Jackson Hole next month to outline the framework for the easing cycle and remind investors that the Fed will likely lower rates gradually once it begins,” adds Raphael Olszyna-Marzys, international economist at J. Safra Sarasin Sustainable AM.

For his part, Brendan Murphy, head of North American Fixed Income at Insight Investment (part of BNY Investments), expects the committee’s official statement to include some modest changes, reflecting how their key inflation metrics are now close to the target and the labor market shows signs of slowing down. “The central bank may be concerned about a potential sudden deterioration in the labor market at some point, so we expect most members to prefer acting soon to ensure a soft landing for the economy. Chairman Powell could also use next month’s Jackson Hole Symposium to set expectations for the rate-cutting cycle,” comments Murphy.

Looking at the United Kingdom

A completely different case from the US is the Bank of England (BoE). According to Katrin Loehken, economist for the UK and Japan at DWS, the outcome of the BoE’s upcoming meeting on Thursday is not clear at all. “The market expects a rate cut with just over 50% probability, and we also anticipate a reduction in the official rate from 5.25% to 5%. However, uncertainty is high because there are good arguments for both sides,” says Loehken.

In this sense, she explains that if most members of the Monetary Policy Committee (MPC) place more emphasis on a prudent and data-dependent assessment of the current situation, the negative surprise in service price inflation in July would be an argument against a rate cut, as would the slow decline in wage dynamics. “With a wait-and-see attitude, nothing wrong would be done in that case. Chief Economist Pill seems to be in the waiting camp after his last speech,” she clarifies.

On the other hand, the DWS economist highlights that updated growth and inflation forecasts should show that the economy is still growing moderately and that inflation is likely to fall below the 2% target in the medium term. Additionally, the current weakening of the labor market also raises the question of how restrictive the central bank should remain.

“In our view, these arguments are more favorable to a first rate cut and are also consistent with the central bank’s generally pessimistic rhetoric. The assessment of voting behavior is further complicated by the new composition of the Monetary Policy Committee. Therefore, only a narrow majority should vote in favor of the expected rate cut,” comments Loehken.

However, Johnathan Owen, manager at TwentyFour AM (Boutique of Vontobel), believes that the BoE may delay this rate cut. “The latest UK inflation figures will bring some relief to consumers, but behind the headline figure, Bank of England policymakers face a more complex picture that suggests rate cuts could still be far off. The latest data showed that the Consumer Price Index (CPI) inflation fell exactly to 2% in May, in line with market expectations and marking a return to the BoE’s 2% target for the first time since July 2021,” argues Owen.

According to him, before Wednesday’s CPI data, markets had largely ruled out any chance of the Bank of England cutting rates in June, although the probability of a cut in August was at 44%. “Despite the Bank of England achieving its headline inflation target of 2%, the rigidity of services inflation, driven by strong wage growth and resilient demand in certain sectors, makes a rate cut in August increasingly unlikely, in our opinion,” defends the expert from TwentyFour AM.

Lastly, Peder Beck-Friis, economist at PIMCO, maintains his outlook and points out that the BoE will make two rate cuts in 2024. “Core inflation is likely to decline as the effects of the pandemic fade, monetary policy remains restrictive, and the labor market rebalances. Rachel Reeves’ comments yesterday show that the new government is firmly committed to fiscal discipline, reducing the upside risks to inflation in the coming years,” explains Beck-Friis.

Japan and Its Historic Monetary Policy

Finally, according to analysts at Banca March, in Japan, investors are betting on a rate hike at the July meeting, especially after the long silence from Governor Ueda—he will arrive at the meeting with more than 40 days without public interventions—and in light of the recent appreciation of the yen (5% higher against the dollar).

Not only is a rate hike expected, but a reduction in its monthly bond purchases could help strengthen the yen even further. “The possibility of a BoJ rate hike could lead to higher yields on Japanese bonds. However, they could see some volatility in case of a surprise. These actions would represent a significant shift in Japan’s monetary policy, affecting bond yields. Yields fell today and could remain under pressure before the BoJ meeting, although they remain near their highs. Additionally, the risks of escalating geopolitical tensions in the Middle East and elsewhere could drive flows into safe-haven assets, benefiting the yen,” explains Bas Kooijman, CEO and manager at DHF Capital S.A.

According to Magdalene Teo, Asian fixed income analyst at Julius Baer, it is still possible for the BoJ to maintain a hawkish stance by setting the stage to reduce bond purchases with a clear and bold plan to raise interest rates. “In any case, the big decision this week will come from Japan. Any communication error could be costly for the BoJ. The AUD and most Asian currencies, except MYR, IDR, and KRW, depreciated against the USD yesterday,” concludes Teo.

BNY Investments Launches a New Global Aggregate Fixed Income Fund

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BNY Investments has announced the launch of the BNY Mellon Global Aggregate Bond Fund, a vehicle managed by Insight Investment (Insight), a global manager with $838.1 million in assets under management, of which $252.6 million is in fixed income.

According to the asset manager, the fund launches with an initial capital of approximately $150 million and will primarily invest in government debt securities and investment-grade credit from around the world. The strategy is co-managed by the Global Credit, Global Rates, and Macro Research teams. These three teams are part of Insight’s Fixed Income Group (FIG), composed of 166 investment professionals worldwide. Specifically, the vehicle will be led by Adam Whiteley, Head of Global Credit, and Harvey Bradley, Senior Portfolio Manager, in coordination with Portfolio Manager Nathaniel Hyde.

“Our approach focuses on selecting the best ideas from a set of global fixed income opportunities to build a truly diversified portfolio. While we prioritize investment-grade debt, we can invest in high yield and emerging market fixed income. When building the portfolio, the team combines Insight’s top-down macroeconomic analysis with bottom-up security selection to identify opportunities that offer attractive risk-adjusted returns regardless of market conditions,” explained Peter Bentley, Co-Head of Fixed Income at Insight.

Sasha Evers, Head of Europe ex-UK at BNY Investments, added: “We are in an ideal moment for fixed income because yields are at levels we haven’t seen since before the global financial crisis. This new fund is managed the same way as the global aggregate fixed income strategy launched by Insight in 2015, which has assets of €9.2 billion.”

The fund is part of BNY Mellon Global Funds, plc (BNY MGF), the range of products domiciled in Ireland, and is registered in Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Singapore, Spain, Sweden, and the United Kingdom.

Political Uncertainty, Inflation, and Central Banks Will Shape the Exchange Rate Between the Euro and the Dollar

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The political uncertainty following recent European elections and ahead of the U.S. elections in November this year is a key factor in evaluating the future of the euro-dollar exchange rate. Additionally, this situation is compounded by the evolution of inflation in both economies, which is decreasing at a slower pace than expected, and the decisions that the ECB and the Fed will make regarding the pace of interest rate cuts.

To provide an approximate forecast of how the euro-dollar relationship will evolve, we have gathered analysis from various experts. For example, Claudio Wewel, currency strategist at J. Safra Sarasin Sustainable AM, considers it unlikely that the euro will rebound, as manufacturing momentum is slowing, although the currency should rise once the Fed starts cutting rates.

“Since the beginning of the year, the euro has had a mediocre performance. So far this year, it has fallen by around 3% against the U.S. dollar, while it has recorded a 1% rise in trade-weighted terms. Notably, the euro’s fluctuation band has been narrowing in recent years, and since January, the euro-dollar ratio has remained between 1.06 and 1.10,” Wewel points out.

According to his view, the duration of the current episode of “prolonged rise” will depend on the data. In this regard, he notes that the latest U.S. macroeconomic data have been weaker than expected, suggesting a moderation of the U.S.’s superior cyclical performance. However, he sees it as unlikely that the cyclical euro will benefit from the weakening economic activity in the U.S., given that the main economies of the eurozone have seen disappointing manufacturing PMIs in June.

“In this relative cyclical context, the ECB should be able to cut its policy more than the Federal Reserve this year. Along with the greater rigidity of U.S. inflation, the Fed’s less deep rate cut path than the market expected also reflects the increased odds of Donald Trump’s victory in the 2024 U.S. presidential election, which markets have started to consider as the base case. In our opinion, Trump’s policy mix would likely be more inflationary than a continuation of Biden’s policies, implying that in 2025 the Fed would implement fewer rate cuts in this case,” adds the expert from J. Safra Sarasin Sustainable AM.

From Ebury, they point out that market nervousness and uncertainty will benefit safe-haven currencies. The fintech predicts a slight appreciation of the euro-dollar pair in the coming months, which will largely result from “some convergence in economic outcomes across the Atlantic in 2024, as the U.S. economy slows after an impressive year, while the eurozone accelerates from a very low base.” Ebury analysts believe this circumstance “will push the pair back towards the 1.10 level by the end of the year, with further appreciation towards the 1.14 level in 2025.”

However, they warn that the outcome of the November presidential elections in the U.S. could pose a risk to this view. “A Donald Trump electoral victory, which markets currently assign about a 50% probability, could be bearish for EUR/USD if the former president doubles down on the protectionist policies that characterized his previous tenure in the White House,” they explain.

Parity: An Omen of Bad Luck?

Finally, according to Bank of America, parity between the two currencies is “rare” and “has not lasted long,” and they believe that for it to happen again, “everything would have to go wrong and stay that way.” According to their analysts, the probability of the euro/dollar reaching parity or less using quarterly data is zero.

“The verdict is still out on whether the euro/dollar will stay at its post-2014 lows or recover to its previous highs. Much depends on the balance between unsustainable debt and U.S. exceptionalism, and to what extent Europe unites to tackle its severe challenges stemming from geopolitics and energy dependency. A potential trade war after the U.S. elections could further weaken the euro. However, for us, parity remains only an outcome in extreme risk scenarios, and even then, we wouldn’t expect it to last long,” explains the entity in one of its latest reports.

Drawing on historical perspective, BofA indicates that the euro/dollar fell below parity only in exceptional circumstances that did not last long. Specifically, it did so only during the periods of 2000-2002 and from August to October 2022. “The first period, which was the longest, occurred during the dot-com bubble in the United States and its burst. The second period was during a perfect storm of negative shocks for Europe, with the war in Ukraine triggering a severe deterioration in its terms of trade through an energy shock, and with divergent monetary policies as the Fed was raising rates while the ECB denied inflation, delaying its policy tightening. However, the euro/dollar was above parity in November 2022, as these shocks began to diminish and the ECB started catching up with the Fed,” they point out.

Their analysis shows that the euro/dollar weakened but stayed above parity during other severe shocks. For example, it was well above parity during the global financial crisis and the eurozone crisis. It weakened substantially but also remained above parity during the ECB’s negative policy rate period after 2014. “Similarly, it stayed well above parity and without a clear trend during Trump’s first term in the United States: the euro/dollar initially strengthened and then weakened. It also remained well above parity during the pandemic,” concludes BofA in its report.