Market expectations have taken a ‘moderate tilt,’ says strategist

Laura Cooper, BlackRock Senior Macro Strategist for iShares EMEA, joins Yahoo Finance Live to talk about how markets are performing after the Fed’s FOMC rate hike, volatility, inflation pressures, expectations of a recession in Europe and the outlook for the economy.

video transcript

BRAD SMITH: A bit of commentary from Fed officials already today, with more to come, as I mentioned a moment ago, as markets try to gauge where the central bank is headed and where its head is at. Our next guest says that the Fed’s hard line has probably peaked, along with inflation. But how long we will remain at that peak is a different story.

Let’s bring in Laura Cooper, BlackRock’s Senior Macro Strategist for iShares EMEA. Laura, how nice to have you here with us today. First of all, help us break down if the Fed’s hawkishness has really peaked and inflation, if that has also peaked here at this point.

Laura Cooper: Well, I think there’s probably room for the Fed’s hawkish stance to persist. But what we’re seeing in terms of market rates is actually this recalibration of expectations after the markets actually interpreted the FOMC meeting last week. passed with a moderate incline. Clearly, we’re seeing the Fed members walk out, we had a talk today, yesterday as well, really confirming the fact that this is a Fed that really wants to ensure price stability. And that will likely come at an economic cost.

JULIA HYMAN: I’m always fascinated here, Laura, where the Fed essentially says the same thing, then repeats it, and the market reacts completely differently, right? And that’s not… I know your focus is EMEA, so it’s not just happening here, it’s also happening with the ECB and other central banks. What gives?

Laura Cooper: Well, I think that’s a great kind of context right now in the fact that we’re actually seeing central banks deviate from forward guidance. Therefore, it leaves the markets with a little more uncertainty about the way forward. So if we look at both the Fed and the ECB being data dependent.

So we would expect that to lead to a bigger bout of volatility, in particular, until we have those September meetings, because we’re still seeing inflationary pressures build up in the US that growth is still pretty resilient, whereas in Europe it’s quite different. So it’s really a backdrop where this data will dictate what central banks do. That leaves the markets guessing, what underpins this volatility.

BRIAN SOZZI: Laura, do you think the markets here in the US are underestimating the probability of an economic hard landing in Europe?

Laura Cooper: I think, well, I mean… in Europe, I mean, that’s a great question. I think our base case is that we will probably see a recession in Europe in the second half of this year. Certainly, the second quarter data didn’t suggest that yet. There is this resilience in Europe.

But if you think about the PMIs softening, we had unexpected contractions in France and Germany, and also if you look at consumer confidence, this is deteriorating quite sharply. That sets up a pretty challenging backdrop for the latter part of this year. I think there are areas where the markets are not accurately pricing in that, in particular equities, which is one of the reasons why we actually prefer to take exposure in credit over equities at this current juncture.

BRAD SMITH: However, for those who have exposure to equities, and perhaps the equity names they are invested in also have significant exposure to Europe, what would you advise in their own strategy at this time?

Laura Cooper: I think it’s really about being quite selective. So we still advocate a bar approach to portfolios. But certainly what we’re seeing is that there probably needs to be a bit more of a defensive lean. Looking at what came out of the recent earnings season, in particular, technology was pretty resilient. We made better-than-expected earnings.

That argues for what we hope to really be these secular fundamentals advancing in a strong demand environment. So we would like exposure there. And it’s more about defensive sectors — think health care, utilities, commodities — I think it’s really hiding in that kind of environment, regardless of whether we see a recession in Europe, which is our case. base, and the US potentially more late next year.

JULIA HYMAN: There is another thing that you guys recommend as a tail risk hedge that caught my attention, and that is gold. And it draws my attention because it hasn’t worked so well, true, as coverage so far this year. Is it more of an insurance to keep in case something really happens outside the bucket?

Laura Cooper: That is the case. I mean, I guess it’s the context of how we perceive a hedge. So if we look at it as a hedge against inflation, it certainly hasn’t worked that way. But in this environment where we have seen real yields slump quite a bit since mid-June, that has provided a bit of a tailwind to gold.

But when we think about it, it is more of a diversifier in portfolios. So our base case is not that we’re going to see an escalation of geopolitical tensions or a severe material recession in the US, but you’d like to have that exposure in portfolios should any of those downside scenarios materialize. tail risk.

BRIAN SOZZI: Laura Cooper, BlackRock Senior Macro Strategist for iShares EMEA. It’s always good to see you. We’ll talk to you soon.

Leave a Reply

Your email address will not be published.