Coffee Break

Last week in a nutshell

• Deadlines have been extended until August 1^st, but tariff rates point higher, as a 35% tariff on non-USMCA Canadian goods was announced, part of broader trade measures.
• A "Made for Germany" summit in July should deliver €300bn in capex pledged over three years, led by over 30 major German firms.
• FOMC minutes revealed division over rate cuts, with some pushing for action soon. Inflation concerns, especially from tariffs, are delaying consensus.
• Commodity prices climbed on lower OPEC+ increases beyond this summer, weak US output, Red Sea tensions, and Donald Trump’s copper tariff announcements.
• The Reserve Bank of Australia surprised by holding rates steady at 3.85%, defying expectations for a rate cut.

Investment convictions

Core scenario

• United States: Growth momentum is fading as hard data deteriorates, with the economy likely to slow further in H2 2025. Inflation remains sticky and could reaccelerate towards 4% by year-end, delaying the return to the 2% target until 2027. While the Trump administration pushes its economic agenda supported by a weaker dollar and lower oil prices, higher tariffs and redistribution effects create mixed signals for markets and policy.
• Euro zone: Growth has shown timid improvement recently, but the region remains vulnerable to external shocks, particularly the looming impact of US trade tariffs. Inflation has moved into neutral territory, offering the ECB room to ease policy if needed. A recession should be avoided, but risks to the downside persist.
• China: Economic growth is underwhelming but relatively stable, with ongoing deflationary pressures weighing on sentiment. A trade deal with the US is expected by August, but the domestic outlook remains fragile amid weak demand and structural challenges. Monetary and fiscal tools remain available to prevent further deterioration.
• Global growth is trending lower, with diverging inflation dynamics across regions, deflation in China, neutral inflation in Europe, and stubborn inflation in the US. The path forward depends heavily on US policy choices and tariff outcomes. Amid an elevated uncertainty and a wide range of potential macro scenarios, forecasts are subject to frequent revision.

Risks

• US trade and fiscal policy: Although tariff escalation has been temporarily postponed, uncertainty remains high around the scope and implementation of US trade measures. The Trump administration’s evolving agenda, including a significant redistribution bill and rising tariff revenues, continues to fuel volatility in sectors like pharmaceuticals and base metals. Market sentiment is vulnerable to any reversal or surprise as the 90-day tariff pause is expiring.
• Growth fragility and data confusion: Economic signals remain mixed, with hard data in the US deteriorating and soft data already weak. The gap between sentiment and reality is narrowing, but not in a reassuring way. Across major economies, forward-looking indicators are losing steam without falling off a cliff, and the risk of underestimating the slowdown is growing.
• Geopolitical tensions and policy fragmentation: Armed conflicts in Ukraine and the Middle East continue to pose risks to energy markets and global security. Meanwhile, divergent central bank paths and rising protectionism are adding to policy fragmentation. In China, deflationary pressure reflects deeper structural issues, while in Europe, the full impact of US tariffs could disrupt what little growth momentum exists.

Cross asset strategy

1. With recession fears easing despite tariff uncertainty, the comeback of US Tech leadership, and Congress’ approval of President Trump’s "One Big, Beautiful Bill Act", financial markets got a boost.
2. Global equities:
   • Our cautiously optimistic stance remains measured: Renewed trade tensions and tariff hikes, now scheduled for early August, present meaningful risks to global growth and corporate margins. Hence, positioning remains Neutral overall, with no significant regional bias.
3. Regional allocation:
   • We tweaked our exposure to US tech equities, capitalising on the recent breakout signal of the Nasdaq index and the renewed leadership of the tech mega caps ahead of the Q2 earnings season.
   • Europe and Emerging Markets, while more exposed to trade tensions, could be supported by more attractive valuations and stronger fiscal responses, offsetting tariff-related headwinds.
4. Factor and sector allocation:
   • We focus on resilient themes such as Technology & AI, European Industrials, and German Midcaps, while acknowledging trade-related headwinds in areas like Pharma and Semiconductors.
5. Government bonds:
   • We are slightly constructive on duration in Europe, where ECB support and government stimulus continue to anchor yields.
   • The Fed has more time to hold rates steady and focus on how inflation is developing: We are Neutral on US Treasuries.
6. Credit:
   • In credit, we prefer Investment Grade—particularly in Europe—due to solid fundamentals, while remaining cautious on High Yield given tight spreads.
   • Emerging market debt benefits from positive real yields and a weaker USD.
7. Alternatives play a crucial role in portfolio diversification:
   • Gold remains overweight as a strategic hedge against geopolitical risks and real rate volatility. Demand is supported by central bank buying and retail inflows.
   • We maintain an allocation to alternatives to provide stability and diversification from traditional asset classes.
8. In currencies, exchange rates will remain a focal point in trade discussions and broader market dynamics.
   • We are overweight defensive currencies (e.g., Japanese yen) and expect USD weakness as growth softens.

Our Positioning

We maintain a neutral stance on equities, with a flexible allocation across regions, balancing short-term US policy boosts with longer-term valuation concerns. In government bonds, we are slightly long European duration, where steep curves and policy support offer attractive risk-reward. In credit, we are slightly overweight on European Investment Grade, underweight High Yield, and diversify into emerging markets debt. Alternatives continue to provide portfolio stability, with precious metals retained as a strategic hedge against ongoing asymmetric risks and a weaker US dollar. This balanced positioning reflects our conviction that diversification and agility are essential amid the start of the Q2 earnings season and the final weeks in trade negotiations with the US. The summer of catalysts starts now.