Markets “feel” a bit like they are running out of puff, as yields climb ahead of Jackson Hole. Fed likely to push back on the “dovish pivot” interpretation of/by the market, and will continue to tighten into an inverted yield curve.
Given the fairly strong rally in risk, into what we think is a misinterpretation by the market (there is no dovish pivot, there is no pause in the rate hiking cycle) we’ve been inclined to fade the rally, using Aussie shares as the main DAA lever, given a) it’s better relative performance/lower-drawdown and b) it’s high beta risk-on-risk-off nature and c) it’s greater allocation to resources, which have performed well in this recent bounce.
The single best model we have is predicated on information contained in the shape and slope of the yield curve, and that model is flashing red.
We are mindful that you can adjust the yield curve for risk premia, here, term premia, and come out with a much more benign reading (also shown above) which is why we aren’t/don’t use the model to sudden thunder out of equities.
But, at the margin, given recent strength and our worries about the Jackson Hole symposium, we are moving somewhat more defensive.
We’ve also had a fantastic run of outperformance in our infrastructure allocations, which have proved an excellent inflation hedge, and are using that strength to move modestly lower.
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