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Trying Times While We Wait for Lift-Off : There are two key issues that will shape the investment climate in the July-September time period: The FOMC and the reversibility of monetary union in Europe.

  • It has been six years since the US recession ended, and the Federal Reserve has not lifted its target for the Fed Funds rate, which stands at 0-25 bp. Will it find the opportunity to do so towards the end of Q3? Will it be disruptive?
  • European integration is being torn apart by Greece’s financial crisis and refugees fleeing North Africa and the Middle East. European leaders are facing significant difficulty in resolving these issues. Does Europe have sufficient political will and courageous leadership to overcome the existential challenges? Is monetary union irreversible? If the center of the world economy has shifted east, what is the role of the western tip of the Eurasian landmass?

The Maturing of Abenomics: Implementation of the Third Arrow

  • We expect a moderate economic recovery is at hand, helped by growth in private consumption, business investment, and net exports.
  • The Abe government has a strong approval rating which has allowed them to focus on more long term goals, including the third arrow of Abenomics.
  • The yen is likely to depreciate against the dollar based on monetary policy divergences between the US and Japan.

Emerging Market Spotlight: Expectations of an Elusive Emerging Markets Rally

  • The four major factors behind the decade-long EM rally have basically evaporated, and show little sign of returning anytime soon; as such we think a sustainable EM rally will prove elusive in Q3.
  • Until we see the Fed lift-off, we believe EM assets will continue to trade with a negative bias, although some countries will fare better than others, particularly in Asia.
  • For all EM asset classes, we continue to see divergences across countries, so we recommend that investors continue to differentiate.