When directional bets are impossible - Our weekly cross-asset views

Headline risk intensifies, with investors caught in a constant swing between hopes for a deal and fears of escalation. Hence the strong positive correlation across risk assets, commodity and bond markets.Equities are flattish overall this week. The size of the equity drawdown remains weak as compared to asymmetric risks from this current energy crisis. Investors remain in a “wait-and-see” stance, and implied volatilities are still exceeding realized ones. Investors deleveraging is underway, but many pockets of risk appetite persist, evidenced by the rebound this week of MSCI Latam (+4.4% WTD), RTY (+2.3%), US Value (+2.6%). Carry strategies continue to do well (notably on FX), while credit markets have demonstrated overall resilience (EMBI spreads +7bps since the conflict began, US IG +2bps, US HY +17bps only). In contrast, US mega-techs continued to struggle with disruption and regulatory fears (the Magnificent 7 are down 2.2% this week bringing their total drawdown to 15% since December).On the rates front, the bear flattening trend persisted, particularly in the US, where the 2-year broke above 4%. Long-term real rates also climbed (+12bps for the real 10-year, +43bps MTD) and volatility fails to decrease. Safe-haven assets have offered little refuge at this stage: gold is positively correlated to equities and the dollar's typical strength during periods of rising real rates is subdued (+0.3% for the DXY this week).The two polar outcomes of war—further escalation or a peace agreement—seem equally likely in the short run. Hence, directional bets are clearly difficult to take. Our central scenario is a 2-month disruption, but we fear that things will need to get worse before a peace deal can be reached. There is no doubt that the markets will rally if a deal emerges. However, it is probably wiser to miss the first leg of the rally than to get things wrong all the way.