RBC BlueRay: The value on offer is compelling

April 14, 2023

The relatively benign inflation numbers should act as a volatility suppressant over the short term, but calm conditions may not prevail for long.

Markets were relatively muted in a holiday-interrupted week. Core government bond yields reversed moves lower on a robust US payrolls report last Friday, while risky assets displayed a degree of stability as banking sector concerns continued to subside. In Washington, policymakers were out in full force this week, with IMF meetings bringing together the central banking community at a critical juncture. Mark Dowding, BlueBay CIO, RBC BlueBay Asset Management, looks at the outlook for the US, Eurozone, and Japanese markets.

Fed

‘RBC BlueBay remain skeptical that inflation and growth will moderate enough to justify the rate cuts that are currently priced into market expectations from September. With this view, RBC BlueBay still think there is material upside for yields at the very front end of the US Treasury curve.’

Eurozone outlook

‘The ECB still has more need to tighten than is the case for the FOMC, and with banking risks less likely to be a lasting issue in the eurozone than may possibly be the case in the US, RBC BlueBay see scope for the euro to outperform the US dollar over the coming months.’

Bank of Japan

‘Over the holiday period, the new Bank of Japan Governor, Kazuo Ueda, delivered what has been taken as a fairly dovish speech, however, his comments do not change the firm’s ongoing confidence in the structural short position in Japan rates.’

Corporate credit markets

‘Global IG banks spreads are at the widest levels versus non-financial spreads for many years, and while this may persist in the near term due to the fallout from SVB / CS, RBC BlueBay think the value on offer here is compelling.’

Looking ahead

‘The relatively benign inflation numbers should act as a volatility suppressant over the short term, but we think calm conditions may not prevail for long. Framing the facts, current market conditions are tricky to navigate when data is mixed and volatile.

When you layer on top the uncertainty surrounding the tightening of credit conditions that will ultimately come through from the crisis in the banking sector, it difficult to have high conviction macro directional bets at this juncture.’