BlueBay AM: Longer-term conditions bullish, but potential for a summer squall

19 jul 2019

Mark Dowding, CIO at BlueBay Asset Management, has issued his latest market insight in which he discusses the upcoming Federal Reserve and ECB meetings, as well as the outlook for UK amidst continued Brexit uncertainty.

Key points include:

• The UK: BlueBay continue to believe that uncertainty and chaos will persist into the autumn and expect volatility around the party conference season, but for now it makes sense to be reducing the position. The pound hit a two-year low versus the US dollar earlier in the week and we believe risks will continue to lie to the downside.
• The Fed: BlueBay believe the Fed will deliver what the market expects in the short term, but further out the market is far too pessimistic on the robustness of the US economy.
• The US Dollar: The possibility of Trump’s intervention has made BlueBay less enthusiastic about running long USD, despite the strong performance of the US economy, and our view that US rates should move higher.
• The ECB: BlueBay are concerned that expectations for the ECB next week are somewhat elevated, increasing the risk of disappointment, and this may warrant a short-term reduction in ‘risk-on’ beta ahead of the meeting.
  • The team remain ‘risk-on’ in terms of spread-duration exposure, via European sovereign risk (Greece and Italy stand out particularly from a valuation perspective), and in terms of corporate and financial credit risk.