Stock and bond bifurcate as Central Banks actions are repriced

We underline two themes. Firstly, the implied pricing of central bank rate paths has been scaled up to more reasonable levels. As of Friday, markets were pricing some 82bp of cuts from the Fed this year, and 91bp from the ECB –from peak of nearly 175bp for both at the turn of the year.

We stick to our 100bp forecast for the ECB, but now only see 75bp cuts by the Fed, with both pivot in June. We are starting to warm up to bonds, as slightly higher yield levels would be an opportunity to extend duration. Equity markets have proven remarkably resilient to the central bank repricing and the ensuing higher yields. The bifurcation over bonds owes much to the ‘AI miracle’, abundant liquidity and rising optimism about the economy.

Still, the cycle remains fragile and exposed to several risks, first and foremost (geo)political. Therefore, we warn that bullish investor sentiment and positioning, as well as depressed risk asset volatility, may also reflect a bit of complacency. Our underweights in Equities and High Yield credit are small, but we prefer safer (IG) buckets in Fixed Income and retain a tactical Cash overweight.