WHAT’S OLD IS NEW
It seems appropriate that the main investment themes at the end of the year are very similar to commentary that we began the year. In particular, we and practically everyone else is focused on the imminent Fed rate hike and potential policy divergence that this would create. We don’t have much to add to this part of the conversation, other than to say that we continue to expect a more dovish ECB to emerge after their meeting this week, while the odds of a Fed lift-off have been mostly stable in the 70% range. Recent economic data has been on the weak side, which has not deterred lift-off conversations, although the path of future hikes has come into focus. With this backdrop, some risk assets have performed well, particularly equities, while the curve continues to flatten. Risk- on has not been universal however, as investment grade spreads have not tightened, remaining near YTD wides, while HY average spreads are again above 8%. EM has performed relatively well, breaking recent correlations with the HY market as average spreads for both hard currency and local currency bonds have been mostly stable. U.S. dollar strength is again a critical aspect of the conversation, as the Euro has fallen back into the 1.05-1.06 level, although the short euro trade feels heavy to us again. Our assessment is that divergence will nonetheless continue to support the move to parity and below in the intermediate term.