Top 4 themes which are driving risk sentiment and price action across assets

2) US ,

3) Middle East geopolitics and

4) Developments in China.

The US data has been resilient on all fronts; growth, employment and inflation. Corporate earnings so far have been mixed. Comments from the US Fed members have been hawkish, indicating willingness to keep rates higher till the time there is reasonable confidence that inflation is on course to reach the 2% mark. This has resulted in expectations of number of cuts that the Fed would deliver this year getting dialled back.

US Q1 came in at 1.6% against expected 2.5% QoQ annualized. However, this was primarily on account of higher imports, which indicates that consumption is still going strong.

Middle East geopolitical risks which were threatening to disrupt the risk rally seem to have faded for now but these risks would keep lurking till the time Israel continues its aggression against Hamas in Gaza.

Recent China data has been pointing to some green shoots as far as revival in consumption is concerned. Further stimulus expectations have therefore subsided for now. However, data around consumption and property sector in China need to be closely monitored.

Given all the concerns around Fed delaying rate cuts and Iran-Israel tensions, risk assets have been extremely resilient. The default mode therefore seems to be 'risk on'.

Despite S&P 500 earnings yield being lower than the yield on US 10y treasury bond, every dip in equities is getting bought into aggressively. Even domestically, in the absence of any negative news flow, INVIX (India volatility index) had dropped from 13.5 from 10.5 in just one session, indicating the extent of optimism.

The fact that despite all the risks it had risen to only 13.5, is in itself indicative of the prevailing sentiment. Even in case of USD/INR, the 3 month volatility had dropped by 50bps in just a couple of sessions, from 3.25% to 2.75% as soon as stream of negative news flow dried up.

We however remain a bit skeptical on global as well as domestic equities given the elevated valuations. We continue to maintain our bullish view on gold and feel that the current retracement is a buying opportunity.

On bonds, we feel, considering the fact that the shorter end of the US yield curve has risen due to Fed rate cut expectations getting pushed back, the US yield curve is not as inverted as one would expect and is quite flat.

Only 30bps separates the 10-yr yield from 2-yr yield and therefore we believe these are extremely attractive levels to add duration to the portfolio.

(The author is Founder and CEO IFA Global)

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)