Markets are at a critical macro crossroads.
On one hand, US business activity expanding at an 8 month high and Q2 earnings to remain solid.
On the other hand, Brent crude surging back above $100 a barrel last week, although right now we are seeing a pullback now.
The White House has rolled out a new wave of Section 301 tariffs and markets are now pricing in a Fed rate hike this year with major central bank decisions in the US, UK, as well as Japan on deck. with earnings from mega tech giants, all eyes are on volatility as well as key technical levels for the major equity averages.
Well joining us this morning with his global macro playbook is Chris Watling CEO and chief market strategist at Longview Economics.
Chris, great to have you here.
Thank you so much for joining me.
Thank you.
Well right now we are looking at a relief rally on Wall Street, but we have to step back and look at the global situation.
So this week is a big bang.
For global central banks.
So what do you make of where we are right now for the economy?
The global economy, it's kind of it's all very US centric at the moment if you think about the global economy.
China is doing well on its export side, but its domestic economy is pretty weak.
We've seen that with a lot of recent data.
Europe's really sort of spluttering.
There was a sense last year that by now Europe would be getting going and it's not really doing that.
The UK, we've got a new prime minister.
We seem to be the guys that have a new one every 18 months or so.
Uh, and of course it's all about US and it's all about AI and Capex and, and actually the expansion in the US seems to be broadening.
If you look at the credit cycle, the industrial cycle, these things I think are really encouraging.
So it's, it's kind of a global economy that's, that's driven by the main US economy primarily at the moment.
Yeah, and of course artificial intelligence.
Something all of us are paying attention to from the technology to the investment theme.
So I know you've been traveling around the globe recently.
So given what we're seeing in terms of dominance in AI of course in the US, but also in other areas of the world, what do you think is the key takeaway, especially with the focus being on?
The key takeaway from traveling around the world is everyone wants to talk about the states.
At least 1218 months ago, Europe was getting a look in.
You know, there was some excitement.
You remember that we were getting the European Defence Fund and European stimulus out of Germany and things were starting, you know, the rate cuts. were being, were happening, so but I think that and the offset with the oil, the Iran situation are two very juxtaposed, contrasting themes that are really critical in the way markets play out in terms of themes that people are talking about.
Yes, and of course all eyes are on the geopolitical conflict in the Middle East, especially because of rising energy prices.
So here in the US we might be paying attention to the average gallon of gasoline, but also diesel.
And when we're talking about other areas. of the world that gas also comes into the equation and with the uncertainty right now regarding the conflict and a lot of moving parts here when it comes to the macro political situation, what is your outlook for global central banks, not just for the Fed?
Well they've got a tricky situation because they don't really know where the oil price is gonna go because we don't really know how this conflict's gonna pan out, and it's on up and down, the oil prices that we've seen today, awful lot, up a lot last week, uh, you know the story.
So, so it's difficult for them and they worry about second round effects, but I think when you look under the surface in the Western economies, US, UK, Eurozone, I don't think there's much inflationary pressure.
If you think about the bottom half of the cave, everyone's been talking about the bottom half of the cave, the lower income groups struggling.
You know, there's not a lot of money around, so the idea they're going to drive inflation is really not a non-starter in my opinion, and you're seeing that in the data when you start to dig into the detail.
US inflation is not really prices have risen a lot over the last few years, but they're not rising fast anymore in my opinion.
Yeah, so when it comes to geopolitical risks, how are you hedging?
You can hedge by buying energy stocks which globally are remarkably cheap relative to the market again.
They were very cheap 6 months ago.
They became reasonably priced in March when the oil price rallied, and now they're cheap again.
That's certainly one way to do it.
You can also do it through currencies.
You just pick your one that hedges against.
I mean, you've got to have a global portfolio to do that.
And so on, but I think all of those are quite interesting ways to hedge, and actually we quite, we haven't liked gold for a while, but I think gold's due a bit of a bounce here ironically as a geopolitical hedge because it's oversold.
Yes, in another area we continue to monitor, in addition to the broader equity markets, global equity markets, as well as the AI trade income. and FX is of course what's happening in terms of the rate outlook.
So we all know the geopolitical situation does matter and there is uncertainty, but we all know that Wall Street is not the economy.
So when it comes to growth here in the US, what are your expectations, especially given that the Federal Reserve has this dual mandate.
Well, I think, I don't think they're going to raise rates this week.
I think that's highly unlikely, I think.
What we'll find is they probably don't raise this year and I think they'll start raising next year.
So I think policy rates, Fed funds rates start to move higher as we get into 2027.
The reason I say that is because at the moment we're in a bit of a sweet spot.
Apart from oil, there's not a lot of inflation.
Growth's quite good on AI CPE, but actually what we're seeing is a broadening of the US economy, as I mentioned, which means we should start getting more momentum as we get into 2027.
So you should start needing rate hikes for good reasons, not for bad.
Good reasons there's growth around and, and it's broadening out and it's trickling down to the bottom half of the case.
So, so I think, I think policy rates will go up next year.
Uh, 10 year bond yields will go up faster and you'll steepen the curve up because they're moving at a faster clip.
So, so I actually think it's a very good outlook.
Oil is a bit of a risk.
Iran's a risk, but the oil prices are moving between.
70 and 90 is not the end of the world really.
Oil going to 150 is an issue.
Tank bottom is something to think about and debate, and we're discussing that, the idea that you actually run out of crude at some stage.
But um, but putting those risks to one side, I think the central case is, as I described, is actually quite benign.
And finally, before I let you go, since we are here on Wall Street at the New York Stock Exchange, I do want to get your take on the broader markets here.
I understand that you've described what we've seen as a beautiful consolidation, so walk us through this.
What I, what do I mean by that?
It's a bit of a sort of, it's a bit of a strange term, but um I remember Ray Dale Dale used to talk about beautiful deleveraging.
I just felt like we've had a beautiful consolidation in the last 2 or 3 months, really, as we came into May and June, the market was so frothy and speculative, and, uh, you know, really bubbly, you could feel it and.
And that led the big question, how are we gonna resolve this?
And of course what's happened is we've resolved it with this lovely rotation.
And actually under the surface there's a lot of churn, a lot going on, semis down a lot in certain parts of the world, Korea for example, down 30% from their highs in 7 or 8 weeks.
So there's a lot of churn under the surface, but the headline indices are basically flat.
If you look at the S&P, it's basically where it was in mid-May.
So that is a beautiful consolidation, cos the headline is just, it's like and it's like a duck, under the surface it's paddling like mad.
On the surface it looks very calm and serene.
Well, I really like that analogy.
I think it's the first time I've heard of that, but I appreciate your time, Chris.
We will have to leave it there for today.
Appreciate your insights.
Thank you very much.
