Policy uncertainty is repricing risk across asset classes
Market Update
Policy uncertainty is repricing risk across asset classes
Markets are struggling to anchor expectations around the policy path. Each macro datapoint now carries outsized importance, driving frequent repricing across rates, equities, FX, and credit. This is less about an abrupt change in fundamentals and more about a loss of visibility, which in turn elevates volatility and compresses conviction.
Rates – Volatility anchored at the front end
Rates markets remain unsettled, with the front end of the curve the most unstable as rate-cut expectations are repeatedly recalibrated after each macro release.
- The absence of a clear policy anchor leaves short-dated duration vulnerable to sharp repricing.
- Term premia at the longer end are drifting higher as uncertainty about the medium-term path of rates and supply dynamics persists.
Positioning: We stay cautious on the front end. We see selective value in intermediate maturities, but position sizes remain conservative given the volatility regime.
Equities – Earnings multiples increasingly data-dependent
Equity markets have shifted into a regime where earnings multiples are highly sensitive to every macro print. The path for growth and inflation is perceived as narrower, so deviations from the “soft-landing” narrative translate quickly into multiple compression.
- Downside convexity is rising: higher real yields and tighter financial conditions are beginning to weigh on both earnings visibility and risk appetite.
- Market leadership is narrow, with flows concentrated in balance-sheet-strong and pricing-power names, while overall breadth deteriorates.
Positioning: We maintain a bias toward quality – robust balance sheets, recurring cash flows, and clear pricing power. Hedging remains essential given the asymmetric distribution of outcomes.
FX – Higher USD volatility, direction driven by cut timing
FX markets have turned increasingly event-driven, with the USD reacting mainly to shifting expectations on the timing and pace of future cuts.
- Policy uncertainty and risk-off episodes continue to support the dollar’s safe-haven role.
- Cyclical and high-beta FX remain vulnerable, with sentiment rather than fundamentals dominating short-term moves.
Positioning: A modest overweight to USD is still justified until there is greater clarity on the policy trajectory. Selective exposure to high-carry FX is possible but requires strict risk controls.
Credit – Risk premia widening from compressed levels
Credit spreads, especially in lower-quality segments, are starting to reprice higher risk premia as reduced policy visibility challenges the previous complacency in valuations.
- High yield is most exposed where elevated funding costs meet meaningful refinancing needs. Dispersion is increasing as investors differentiate more aggressively between issuers.
- Investment-grade credit remains more resilient, though we see liquidity premia edging higher as volatility in rates spills over.
Positioning: We favour high-quality, shorter-duration IG credit. We are cautious on high-yield names with significant refinancing risk. Selected structured credit with solid collateral quality offers relative value.
Strategic Takeaways
In this environment, the key challenge is not simply the level of rates, but the erosion of visibility around the policy path. Our current stance is built around three principles:
- Quality first across all asset classes.
- Preserve liquidity and optionality to exploit dislocations when they arise.
- Scale risk gradually, avoiding large directional bets into binary macro events.
This framework remains our guiding reference point until the policy and macro narrative regain a clearer anchor.
