Wall Street catches commodity falling knife

It’s been trying to get you to catch it all the way down and still is. JPM this time:

While growth risks are elevated, our base case looks for an acceleration in global growth in the second half of the year, led by China, and a moderation in inflationary forces that should allow central banks to pivot. Last week’s strong US jobs print should allay concerns that the economy has already slipped into recession, though cements the case for a 75bp Fed hike later this month. With most investors positioning for a recession and sentiment extremely weak, if an economic disaster doesn’t materialize we believe risky assets can substantially recover. Markets’ pricing of recession risk intensified over the past month; however, this risk is priced unevenly across asset classes, with much higher risks priced in equities than bonds. Given the disparate recession risk pricing, we reduce the weight of corporate bonds and increase the weight of government bonds in our model portfolio to move credit back to an UW stance. In this way our model portfolio’s pro-risk stance refocuses on equities and commodities, with a credit UW serving as a partial hedge in an adverse scenario. We keep a large overweight in commodities and commodity-sensitive assets given our supercycle thesis and as a hedge for inflation and geopolitical risks. Within equities we favor cyclicals, small caps and EM/China overcrowded/expensive defensives. In rates, with the bulk of the repricing of central bank expectations likely behind us we continue to favor curve flatteners in both the US and Europe, and in FX our strategists retain a defensive and long dollar stance.

In Equities, we reiterate our key overweight in Energy stocks, a deep Value sector which is also scoring well on Quality, Growth, and Income factors. The sector should benefit from higher oil prices given that hedges are rolling off. China demand for energy should be more supportive in H2 given the re-opening.In addition, global energy policy is likely to become accommodative as restrictive ESG policies are relaxed for the sake of improving energy security and easing shortages. Fed hawkishness may be peaking, with markets pricing in 75bps for July. With the bulk of the hiking cycle behind us, this could open the doors for a more balanced Fed which is more sensitive to growth risks. As for the upcoming earnings season, we expect it to be positive but decelerating at the margin. We expect better results for Cyclical Value sectors such as Energy, Industrials, and Financials, while Utilities, Real Estate, and Consumer Discretionary may post negative earnings growth. We would also highlight the attractive risk/reward for Banks based on inflation as a tailwind, healthy balance sheets, and attractive valuations. From a regional perspective, we favor EM over DM given the larger de-rating in EM, lighter positioning, and relative growth momentum. Within EM, we favor China on cheap valuation, light positioning, and the macro policy pivot.

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