THE RETURN OF VOLATILITY: EPISODE 2

While the momentum of risky assets seemed to have returned to a certain extent (US equities at their all-time high, oil above $80, High Yield spreads at their lowest level since 2007, incipient rebound in emerging assets, rising US long-term interest rates), the equity market sell-off this week brought us back to the start of the year when the pressure on US interest rates led to a drastic repricing of equities and volatility. We had correctly identified the risk of a correction in US equities as the positioning in the US market had become excessive. While the deleveraging is probably not completed yet, we cannot see any "organic" risk of a US equity bear market at this stage. Accordingly, we remain overweight equities vs bonds overall. We nevertheless remain tactically cautious in the short term given the multiple sources of risks. Beyond the positioning, and despite the very robust US macroeconomic and microeconomic indicators in absolute terms, their momentum will decline and therefore become more uncertain. As for bonds, the market has (finally) more or less realigned itself to the Fed’s 2019 dots. If US interest rates are close to their fair value (we are turning neutral), the risk of overshooting in our opinion makes High Yield and emerging credit risk asymmetrical in the short term. We believe it is still a little too early to return to emerging countries. In relative value terms, we remain overweight EUR vs USD High Yield .