On Tenterhooks

Investment Rating - The report indicates a mixed investment rating across various sectors, with 38% of stocks rated as Overweight, 46% as Equal-weight, and 16% as Underweight [12]. Core Insights - The report highlights significant volatility in global equity and fixed income markets, with the S&P 500 index dropping over 6% and Japan's Nikkei 225 index experiencing a 20% decline before recovering [2][3]. - The changing narrative around US economic growth is identified as a core factor driving market volatility, with recent employment data raising concerns about a potential hard landing [3][4]. - The Federal Reserve's monetary policy outlook has shifted dramatically, with market expectations now pricing in over five rate cuts this year, compared to under two a month ago [3]. - The Bank of Japan's recent hawkish stance has contributed to global market fluctuations, indicating a divergence in monetary policy between the Fed and BoJ [5][6]. - In credit markets, the report suggests that recent weakness in spread products is justified, particularly in high-yield single B bonds, and recommends hedging against hard-landing risks [6]. Summary by Sections Market Overview - The S&P 500 and Nikkei 225 indices experienced significant declines in early August, with subsequent recoveries of about half of those losses [2]. - Market volatility remains elevated, with measures such as the VIX and MOVE indices reflecting ongoing uncertainty [2]. Economic Outlook - Economists maintain a base case for a resilient economy achieving a soft landing, expecting continued declines in inflation and three 25bp rate cuts in 2024 [4]. - Labor market data will be closely monitored, with a need for positive indicators to support the soft-landing thesis [4]. Monetary Policy - The Fed's path for monetary policy is under scrutiny, with a notable shift in market expectations regarding rate cuts following recent employment data [3][4]. - The BoJ's hawkish comments have led to a significant unwind of JPY carry trades, impacting global markets [5][6]. Credit Market Analysis - The report suggests that investors should consider hedges against hard-landing risks rather than liquidating cash portfolios, particularly in high-yield credit [6]. - Emerging market sovereign credit is expected to outperform high-yield credit, leading to a shift in preference [6].