China

Copper prices are vulnerable to the downside in the coming months on a narrowing global supply-demand deficit. We expect that copper prices will plummet by 15-20% from the current level. However, the lingering structural supply deficit will put a floor under copper prices after this correction.

The risk-on rally is challenging our annual forecast so we are cutting some losses. But we still think central banks and geopolitics will combine to reverse the rally later this year.

The US economy will experience a period of benign disinflation over the next few quarters. Beyond this goldilocks period, either the economy will slip into a mild recession in 2024, or more ominously, a second wave of inflation will prompt the Fed to slam on the brakes, leading to a deep recession.

The regulatory clampdown on Chinese platform companies is over. However, these companies have entered a new phase of active government control. Going forward, most platform companies’ strategic and business decisions will prioritize national interests, at the expense of shareholder interests. After the recent sharp outperformance, we suggest reducing the allocation to China's Investable Index from neutral to underweight within both global and EM equity portfolios.

When does rising unemployment become a bigger problem than inflation? The Fed won't cut rates until that happens, probably thwarting market hopes of big cuts in 2H.

Remain cautious and defensive overall. Stay long DM Europe over EM Europe. Look for EM opportunities in Southeast Asia and Latin America over Greater China.

In Section I, we explain why we do not see the deceleration in US inflation, the likely near-term pickup in European growth, and the end of China’s dynamic zero-COVID policy as signs of a sustainable rebound in global economic activity over the coming 6-12 months. The key question is not whether inflation will fall back to central bank targets, but rather how quickly this will occur. For now, our indicators point to slower but still elevated inflation this year. In Section II, we explore what it will take for the Fed to cut interest rates, and note that nonrecessionary rate cuts are possible but not especially likely.