CME glitch; U.S. dollar on pace for weekly fall; Tokyo CPI - what’s moving markets
Investing.com - Investors are pricing in a "goldilocks" scenario for the world economy, with asset valuations near all-time highs and rate curves across major economies converging, according to analysts at BofA Securities.
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In a note, the analysts including David Hauner and Ralf Preusser suggested that "volatility compression and curve convergence paint a benign picture of the macro backdrop priced into rates" featuring "growth bottoming out" and central banks largely keeping monetary policy steady.
But, they flagged, there are a "constellation of two-way risks" to this outlook.
Of these, the analysts highlighted that they expect volatility to pick up across markets "as we gain a better understanding of the extent to which artificial intelligence will impact" the trajectory of the economy and inflation in the medium-term as well as capital expenditures in the short term.
Stocks have been largely buoyed this year by hopes around the applications of AI, although cracks have recently begun to show in the boom. Concerns have swirled around frothy valuations of AI-exposed firms, along with the eventual returns from massive -- and often debt-fueled -- capital expenditures on the nascent technology by big-tech names.
Still, the AI-driven equity market spike has become a hallmark of the current economy, especially a so-called "K-shaped" post-pandemic recovery, the BofA analysts said. In such a recovery, high-income individuals and certain sectors, like technology, thrive, while lower- and middle-income people and other sectors face financial strain from inflation, rising costs, and job insecurity.
"This K-shaped recovery also contributes to an increasingly difficult tradeoff between fiscal and monetary policy," as lawmakers and central bank officials attempt to weigh the relative merits of policy tools like government spending and interest rate levels.
This, in turn, is one of the factors underpinning months of discussions over the future of the U.S. dollar as a reserve currency, the analysts added.
"The U.S. dollar is likely to retain a dominant global role for the foreseeable future. Still, foreign exchange reserve diversification is a persistent, albeit gradual, trend," they wrote.
With these factors in mind, the analysts suggested a variety of trades investors should consider, including "long gold versus silver" and "long euro against the U.S. dollar," as well as "short Japanese yen."