Last week in a nutshell
- US President Trump signalled he will decide within two weeks whether the US will intervene in the Israel-Iran conflict while Iran reengaged with Western negotiators about its nuclear program in Geneva.
- The Fed held rates at 4.25–4.50% and projected two cuts this year, but raised inflation and unemployment forecasts.
- The Bank of England held rates at 4.25%, citing rising uncertainty and weakening growth, while the SNB surprised markets with a cut to 0% and the BoJ slowed bond tapering but kept rates steady at 0.5%.
- US retail sales, industrial production and housing start were released weaker-than-expected by the market.
- China’s retail sales improved in May, showing surprising strength despite ongoing trade tensions with the US, as consumer spending hit its fastest pace since December 2023.
What’s next?
- Flash PMI data for June will provide an early read on global manufacturing and services, highlighting growth momentum, inflation risks, and potential monetary policy shifts.
- The release of the euro zone’s preliminary inflation data is key as the ECB pauses rate cuts; markets will watch for signs of price developments amid tariff pressures, higher oil prices, and a strong euro.
- Germany’s Ifo surveys will deepen insights into Europe’s largest economy, complementing PMI data and influencing euro zone growth forecasts and investor sentiment toward equities and credit.
- In Asia, China’s NPC signals may indicate upcoming stimulus or regulatory changes affecting emerging markets and commodities, while the BoJ’s Summary of Opinions offers clues on policy normalization and yen volatility.
- Western leaders are set to meet at the annual NATO summit, discussing a security spending target of 5% of GDP.
Investment convictions
Core scenario
- The global economy remains fragile, with growth expected to slow further amid lingering trade tensions despite a temporary US-China tariff truce, and renewed uncertainty over oil prices driven by the Israel-Iran conflict, increased OPEC+ output, and weakening Chinese demand.
- United States: Growth is trending lower and inflation risks remain as tariffs loom large, making the US dollar, hard data releases, and corporate profit growth key to watch in the weeks ahead.
- Europe: With growth holding up and inflation under control – mission accomplished for the ECB – attention now turns to fiscal policies aimed at mitigating broader growth risks.
- China: Growth remains constrained with little sign of acceleration and deflation persists, amid ongoing pressure from its trade confrontation with the US.
Risks
- Armed conflicts in Ukraine and the Middle East: These are impacting oil prices, the broader energy sector, NATO cohesion, and relations with the United States.
- US trade policy: Although there are signs of de-escalation, uncertainty surrounding US tariffs persists. Visibility remains very limited. Market sentiment is fragile and volatility could resurface at any time, even before the end of the 90-day pause of US reciprocal tariffs on 8 July.
- US budget negotiations: This is also a key issue, impacting notably debt and currency markets. Current discussions point to a widening deficit (between 6.5%- 7% of GDP) and potential budget cuts that could disproportionately affect low-income households.
- Noise in the macro data: It is hard to gauge the underlying trajectory of activity, inflation, and policy but economic growth is slowing. So far, some survey data are showing clear signs of weakness, while hard data releases remain relatively stable. Eventually, the two will have to converge.
Cross asset strategy
- With stock markets trading near the top of their recent range and several geopolitical uncertainties looming, we remain comfortable with a cautiously balanced and well-diversified positioning.
- Global equities:
- Our positioning is currently Neutral overall, with no particular regional bias due to capped upside without earnings support.
- Regional allocation:
- US equities appear fully valued, with markets pricing in a benign outcome on trade and fiscal policy. This limits upside potential and may increase vulnerability to disappointment.
- Europe and Emerging Markets, while more exposed to trade tensions, could be supported by more attractive valuations and stronger fiscal responses, partially offsetting tariff-related headwinds.
- Factor and sector allocation:
- In this environment, we put an emphasis on well-diversified factors over strong directional bets.
- The strategy is overweight Global Technology due to AI-driven structural growth.
- Our views are positive on German midcaps, European infrastructure and defence, supported by fiscal expansion.
- Government bonds:
- European sovereign bonds continue to benefit from growth concerns, subdued inflation expectations, and the ECB’s supportive stance. In a multi-asset portfolio, they add valuable decorrelation and serve as a defensive anchor in the event of renewed market volatility.
- We are Neutral on US Treasuries, with risks balanced between inflation and growth concerns.
- Credit:
- In credit markets, we maintain a preference for Investment Grade bonds over High Yield ones, and favour European credit over those in the US. Investment Grade remains a resilient asset class with strong fundamentals, particularly in European credit, where US versus European spreads have returned to negative levels.
- High Yield spreads have tightened significantly, offering little risk premium, so we keep a cautious stance with a slight underweight on both US and European high-yield bonds.
- We have an allocation to emerging markets debt, after a slight upgrade to neutral. The asset class benefits from positive real regional yields, potential support from a weaker US dollar, and the potential easing of tariffs.
- 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 amid ongoing volatility.
- 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
Our base case has not changed as growth is softening across all major regions, but confidence intervals have widened given that the conflict between Israel and Iran has led to a spike in the price of oil. We continue to invest with caution as the global economy remains in a delicate balancing act. Beyond the uncertainties linked to the armed conflicts in the Middle East and Ukraine, we have identified three major catalysts that will impact financial markets in the short term: US trade policy, US budget negotiations, and noise in the macro data.
In equities, we avoid regional biases, emphasizing sector and factor diversification—particularly in areas with strong earnings momentum like Technology and sectors supported by fiscal policy, such as European infrastructure and defence.
In fixed income, we favour Investment Grade over High Yield, with a preference for the resilient European credit segment. We remain neutral on US Treasuries and cautious on High Yield, given tight spreads and limited risk premiums.
Our view on emerging market debt has improved modestly, supported by positive real yields, a softer US dollar, and easing tariffs. Alternatives continue to provide portfolio stability, with gold retained as a strategic hedge against ongoing asymmetric risks.