The strategist says market expectations have taken a “peaceful” turn.

Laura Cooper, iShares’ chief macro strategist at EMEA at BlackRock, joins Yahoo Finance Live to discuss how markets are performing after the Fed’s rate hike, volatility, inflation pressures, expectations of a European recession and the outlook for the economy.

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Brad Smith: Few comments from Fed officials today already, with more coming soon, as I noted a moment ago, as markets try to gauge where the central bank is headed and where its head is headed. Our next guest says that Fed tightening has likely peaked, along with inflation. But how long we will stay at that peak is a different story.

Let’s bring in Laura Cooper, Chief Macro Strategist at BlackRock for iShares EMEA. Laura, it’s great to have you with us today. First of all, only help us break down if Fed tightening really peaked and inflation, if that also peaked here at this point.

Laura Cooper: Well, I think there is probably room for Fed tightening to continue. But what we are seeing in terms of price markets is actually a reassessment of these expectations after markets interpreted last week’s FOMC meeting with a pessimistic bias. So obviously we’re seeing the Fed members come out, today, we talked, also yesterday, to underscore the fact that this is the Fed that really wants to ensure price stability. This is likely to come at an economic cost.

Julie Hyman: I’m always fascinated here, Laura, that the Fed basically says the same thing, then repeats it, and the market reacts completely differently, right? And that doesn’t mean – I know your focus is on the EMEA region, so that’s not just happening here but it’s happening with respect to the ECB and other central banks as well. What gives?

Laura Cooper: Well, I think it’s a great kind of context now in the fact that we’re already seeing central banks veering away from forward guidance. Therefore, it leaves the markets with little uncertainty about the path going forward. So if we look at both the Federal Reserve and the European Central Bank, they depend on data.

So we expect that to be set up for a bigger bout of volatility, in particular, until we get to those September meetings, because we continue to see inflation pressures heading to the upside in the US, where we just had the ISM services print, indicating that this is still Growth is somewhat elastic, while it is quite different in Europe. So it’s really a background where this data will determine what central banks are going to do. This leaves the markets guessing, which supports this volatility.

Brian Suzy: Laura, do you think the markets here in the US are underestimating the potential for a hard landing in Europe?

Laura Cooper: I think, well, I mean — in Europe, I mean, that’s a great question. I think our base case is that we will probably see a recession in Europe in the back half of this year. Sure, second-quarter data hasn’t suggested that yet. This flexibility exists in Europe.

But if we think that the PMIs are coming in softer, we have unexpected contractions in France and Germany, and also, if we look at consumer sentiment, this deteriorates significantly. This is set for a challenging backdrop during the latter part of this year. I think there are pockets where the markets aren’t pricing that accurately – in particular, stocks, which is one of the reasons we actually prefer exposure to credit over stocks at this point in time.

Brad Smith: For those who have exposure in stocks, however, and the names of those stocks they have invested in may also have significant exposure in Europe, what would you advise them on their own strategy now?

Laura Cooper: I think it’s all about an entirely selective issue. So we still defend the iron-to-conservative approach. But sure, what we’re seeing is that there’s probably a need to be a little bit more defensive. If we look at what the recent earnings season came up with, in particular, the technology has been fairly resilient. We made better profits than expected.

This defends what we really expect to be these secular underpinnings going forward against a strong demand backdrop. So we want exposure there. And it’s more than defense sectors — you think healthcare, utilities, commodities — I think they’re really hiding in that kind of environment, regardless of whether we see a slowdown in Europe, which is our base case, and potentially more of that later on in the United States. from next year.

Julie Hyman: Another thing I recommended to you guys to hedge against the tail risks that popped to me, is gold. And it stands out to me because it hasn’t worked well, right, as a hedge so far this year. Is it just insurance in case something happens out of the bucket?

Laura Cooper: This is the situation. I mean, I think it’s the context of how we perceive hedging. So, if we see it as a way to hedge against inflation, it certainly didn’t work that way. But in this environment where we’ve already seen real yields plummet since mid-June, that has provided a bit of a tailwind for gold.

But when we think about it, it’s more diversified in portfolios. So it is not our main issue that we will see an escalation in geopolitical tensions or a severe physical recession in the United States. But you would like to have that exposure in the portfolios should any of these tail risk scenarios materialize.

Brian Suzy: Chief Macro Strategist at BlackRock for iShares EMEA, Laura Cooper. It’s always good to see you. We will talk to you soon.

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