Geopolitics are ‘not really driving market movement,’ strategist says

Eric Theoret, global macro strategist at Manulife Investment Management, sits down with Yahoo Finance Live to discuss market catalysts, including House Speaker Pelosi’s Taiwan visit, as well as the outlook for Fed policy.

Video Transcript

With us in the studio. Good to have you in today. Let’s just start with what we’ve been watching over in Taiwan. I mean, certainly the markets are down today but not the kind of– some kind of conflict. How does this fit into the risk picture?

ERIC THEOREM: Oh, and it doesn’t feel like the markets are reacting to this. I think the story for markets is still what’s happening with the Fed, what’s happening with tightening. We had headlines from the Fed’s Daly just moments ago talking about the degree of tightening. But I think when it comes to geopolitics, it’s not really driving market movements.

–are tightening. You have recessionary worries not just in the United States–many other corners of [INAUDIBLE].

ERIC THEOREM: I think it’s one of risk management, and I think when you look at the markets right now, [INAUDIBLE] primarily driven by the outlook for Fed tightening, right? And I think what we’ve seen is a bit of a relief in terms of the expectation for how much more tightening will be needed to get inflation under control. But my sense at this point is you still want to be paring back risk because this has been what I would say a counter trend move. Not in the clear yet when it comes to inflation and being able to say, you know, mission accomplished. We’ve reached 2%.

Yeah, what’s the expectation on your end in terms of–

ERIC THEOREM: Neutral is where we are now. So the path from here is what they would term to be restrictive policy. And the question is, how restrictive do they need to get? I think there was a sense that they needed to get to 3.5%, so another 100 basis points.

So that’s probably 50 at the next meeting, a pair of 25s by year end. There’s been a bit of a ratcheting down. But of course, when you look at things like– from where the Fed wants to be, right?

So we need to get breakevens back under control. And I think that’s why we see the jawboning from the Fed from Daly just recently, but also, we’ll have Bullard after the close tonight. And I think the Fed really needs to stay focused on that tightening message and make sure that markets understand that.

They would have liked to see after last Wednesday. The Fed said they were going to continue to raise rates–

ERIC THEOREM: Higher above neutral do we need to go? How deep does this tightening need to go? So I think there’s a greater amount of uncertainty.

And I think, again there’s just a bit of kind of a variance in terms of what people took from last week’s meeting, right? I think, as you said, the Fed was very clear. The markets cheered somehow. So I think we just need to really drill down and hone that messaging and make sure that it’s fully–

So overweight US? Are you seeing more opportunities abroad?

ERIC THEOREM: Right, so I think in terms of portfolio allocation decisions, on the equity side, you’ve got a world that’s dealing with zero COVID. You’ve got a world that’s dealing with the Russia-Ukraine conflict. So Europe and emerging markets are really having a tough time right now.

So on a geographical basis, the US is looking great. I think when it comes to– and consumer staples, right? So you want to get out of the cyclical trade. [INAUDIBLE] fixed income, you want to move higher in credit because again, we need tighter financial conditions. That’s not going to be good for high yield bond spreads.

OK, certainly a lot to think about. Eric, good to have you on today. Eric Theoret at Manulife Investment Management, global macro strategist. Well–

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