CITI: It's too soon to call an end to the global deflation trade

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It’s been just over a month since global bond yields, largely led by a selloff in German Bunds, created short-term market volatility across risk assets.

Now, having stabilised at higher levels, many investors are pondering what will happen next. Will yields continue to push higher, something many believe will occur on the back of higher inflation and global growth expectations, or will markets revert to what has served them so well over the past six years – subtrend economic growth leading to low levels of inflation and highly-accommodative monetary policy settings globally.

Citi, in a research note released late last week, believe that it’s likely to be the latter. In their view, they are sceptical the global disinflation trade is over with global growth “not strong enough” and labour market slack “still prevalent”.

Based on this assessment the bank has updated its medium-term market weightings for various asset classes. The chart below shows the banks’ current recommendations.

The further away from the centre, the more overweight Citi is towards the asset.

Given its view that the global disinflation forces are likely to remain, hence monetary policy conditions are highly-accommodative, Citi have offered the following assessment:

“A modest deterioration in the growth/inflation mix is offset by ongoing CB easing and delayed Fed hike expectations. Liquidity tailwinds usually dominate so we maintain our preference for equities over bonds for now. We think it’s too soon to position for full-blown reflation.

Within equities we have upgraded the US to overweight (where it joins Japan) on an improvement in earnings revisions but also a dovish Fed. After downgrading last month, we remain neutral EA stocks for now. Post the rise in yields we upgrade German government bonds to neutral and take UK Gilts to overweight”.

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