Our USD index (JPMQUSD) continues to make new highs. We, like almost everyone, remain bullish on the currency on a view that many aspects of the macro landscape are not yet in the price. One is the Fed’s dots. Two others are the BoJ’s long-term easing program and the ECB’s €3trn balance sheet intention. A fourth is a risk premium in commodity currencies for the possibility that China growth slows below 7%. For all these reasons, we do not think everything is discounted and the dollar can move higher.
Overall, we stay with an overweight in equities, a position we have held since mid-2009. The main threats to equities come from recession, deflation, or a significant rise in uncertainty. We consider each of these unlikely and thus believe the point of least resistance is higher equity prices. The main source of uncertainty should be the impact of Fed hiking. With our view of only 3 hikes, even if less is priced in, we do not think Fed tightening will induce investors to move back into cash for more than a month or so. Deflation is possible in certain countries, but with 3% global growth, not our main view for the world as a whole.
For 2015, we have a probability-weighted expected returns of 2% on the GSCI. This is driven by an expectation that oil prices fall further from here and eventually force OPEC to cut output early next year. This outcome is uncertain to say the least and we give it a 60% probability. Under this scenario, we expect Brent to reach $88/bbl by the end of the year. However, if OPEC does not cut or if it announces a cut but fails to completely deliver on it, we see much lower prices. Thus, our return forecast is highly dependent on OPEC’s course of action and reflects a probability weighted outcome using these scenarios.
JP Morgan