BlueBay AM: Is time running down on the summer rally?

August 7, 2020

Mark Dowding, CIO at BlueBay Asset Management, has issued his latest markets insight, in which he focusses on late-summer caution, FX and US-China relations. 

Key highlights include: 

• US payrolls data: The report due later today could take on greater significance on a negative surprise, which could trigger immediate concerns amongst those who have been calling for a ‘V’ shaped economic recovery.
• Late-summer caution: BlueBay believe it sensible to adopt a more cautious investment stance coming into August. Markets will see heavy issuance in September and expect this to create some pricing concession. It sees relatively low opportunity costs associated with paring exposure for the time being and waiting to see whether a negative catalyst could see a re-pricing in thin summer markets.
• UK growth in 2021: BlueBay would challenge the BoE forecasts on UK growth in 2021, as it expects Brexit to be a material drag any growth rebound in this year, regardless of any deal which may be agreed with the EU.
• USD: Short USD has become a consensual view in the past few weeks, but there are reasons to look for medium-term flows towards a weaker dollar, not least on the grounds of the trade deficit, but also reflecting portfolio flows, given that the rally in US tech could easily rotate towards European stocks should the bull run manage to extend further.
• EM currencies: BlueBay see several EM central banks continuing to ease monetary policy in the weeks ahead and this may continue to limit EMFX performance while creating a relatively constructive backdrop in EM rates. BlueBay continues to see potentially interesting relative-value opportunities across the space, with increased divergence in economic performance between countries in the wake of the Covid crisis.
• US-China relations risks: While the White House won’t want to risk detonating the Phase 1 trade deal and putting the stock market into a tailspin, there is a sense that Trump is becoming more erratic as the days pass. Meanwhile, US policies towards social media firms could also see a backlash from an emboldened Beijing.