FICC

This week we present our Portfolio Allocation Summary for December 2022.

Commodity currencies have been rather resilient, despite the broad rise in the dollar this year. In our view, we are about to experience a big rotation in commodity currency market performance at the crosses, from NZD, to CAD and finally to AUD.

Special Report

We are revising our 4Q22 Brent forecast to $90/bbl, expecting December front-line Brent to average $85/bbl. On the back of this early weakness, we are lowering our 2023 forecast slightly to $115/bbl, with an upside bias, anticipating a successful – if chaotic – re-opening in China beginning in 1Q23. Our expectations for copper trading above $4.00/lb in 1Q23 and above $4.50/lb in 2H23 stand.

Special Report

This week we present six key investment views for 2023.

Chinese social unrest will be suppressed first, then the government will relax policies to stabilize the economy. We are reducing our 4Q22 Brent forecast to $85/bbl as a result of the short-term negative news, but maintaining our $116/bbl forecast for next year.

In this report, we look at the possibility of a dollar decline during any pending recession. In our view, the evidence is mixed. We are probably in one of the most anticipated recessions in recent history, and the dollar has risen a lot. But the dollar also tends to rise during most recessions. We recommend a neutral stance on the DXY, with a bet on some trades at the crosses.

We expect oil inventories to resume drawing and EU sanctions on Russian oil imports to tighten markets. We remain bullish oil and continue to expect 4Q22 and 2023 Brent prices to average $100/bbl and $116/bbl, respectively. We remain long the XOP and COMT ETFs.

Special Report

In this Special Report, we consider what some common monetary policy rules are recommending for the major central banks and derive conclusions on duration strategy and country allocation for bond investors. We conclude that rate hike expectations in most countries may appear appropriate given the current global backdrop of high inflation and low unemployment, but look elevated on a forward-looking basis versus slowing global growth and peaking global inflation.

The narrative that the US can tolerate much higher interest rates, compared to the rest of the world has helped the dollar in 2022. In this report, we examine the sustainability of this thesis, from our holistic assessment of global growth indicators.

Our 4Q22 and 2023 Brent forecasts remain at $100/bbl and $116/bbl. Upside price risk continues to dominate oil markets. We remain long the XOP and COMT ETFs to retain exposure to oil and gas producers’ equities, and higher commodity prices and further backwardation, particularly in copper.