A sweet spot, but keep a sharp eye on the macro side

Risky assets have been in a very strong uptrend since the beginning of the year. The key question now is, where do we go from here? There are two main driving forces to focus on in the current context. Force 1 is the dovish turn of the main Central Banks (CBs) – the game changer this year. The Fed hiking cycle seems to be over for the moment, with the probability of further hikes now very remote. The ECB has gone the extra mile of dovishness by confirming that the “lower for longer” narrative is going to persist, announcing a new TLTRO, and also introducing the possibility of further accommodative measures.

Force 2 is the slowdown in global growth and the very limited inflation pressures, both of which form the rationale behind the dovish stance of the CBs. Macro data have been weak in the EU, and pockets of weakness are visible in the US as well. Going forward, we expect the EU economy to bottom out, and potentially improve in the second part of the year (barring the probability of a confidence shock), and we anticipate a slight deceleration in the US, while we see a very limited probability of a recession. In the first quarter of the year, the looser monetary policies (Force 1) have clearly dominated. The biggest beneficiaries have been risky assets, as goldilocks trades have come back into vogue.