Architas view

Hawkish central bank rhetoric indicates further interest rate hikes. Markets are beginning to feel a little overstretched, following a near 30% rise in US equity markets and a 27% rise in eurozone markets since October 2022. Near term upside for equities could be capped by low summer volumes and traditionally negative markets during September. Nonetheless, the macroeconomic backdrop is increasingly benign, given an improving inflation outlook, strong labour markets and reasonably resilient economic data, so any market correction is not expected to be material or long-lived. In the meantime, hawkish commentary from the US Federal Reserve (Fed) could raise fears of higher or ‘higher for longer’ interest rates. With these risks in mind, our sense is that the Fed and other central banks might intentionally maintain such rhetoric, attempting to combat market complacency or overoptimism, which could itself precipitate a loosening of financial conditions.

We maintain a neutral stance within equities, although continue to prefer the US versus the eurozone. The differentials between the US and the eurozone, in terms of growth (more sluggish in eurozone), monetary policy (probably more ECB rate hikes than Fed hikes to come) and equity style (the US market is more weighted to quality than cyclical/value sectors), should continue to favour US equities. That said it would not be surprising to see a change in US market leadership with more broad drivers of market performance from here. For this reason, we would look to position our US preference outside the mega cap growth names and into broader strategies, such as all-cap funds or equal weighted indices.

Within fixed income, we maintain our neutral position on US government bonds. Yields have moved higher in recent weeks, meaning falling prices, and are now approaching levels not seen since 2007. Nonetheless, we believe hawkish rhetoric from the Fed and other central banks means bond prices will not recover much from here. We maintain a slightly negative stance on eurozone government bonds. The ECB remains on the back foot in the fight against inflation and rate hikes could prove higher than markets expect.

We are looking to take profits on our position in investment grade credit, a trade we have had in place since late 2022, as the yield spread over government bond yields has tightened notably in recent months. We maintain our positive stance on emerging market debt, where credit spreads remain attractive, which could benefit from a period of US dollar weakness. We maintain a neutral stance on global high yield bonds, with a preference for the eurozone markets.