Coffee Break

Last week in a nutshell

• The first US government shutdown in almost seven years, and the third during a Trump administration, has begun. As a result, investors are flying blind on the economic data front as crucial labour market and inflation releases are not being published.
• Supported by stronger-than-expected manufacturing PMIs for Germany and the euro zone, European equities hit new highs, above the levels observed last Spring.
• While September has been supported by better visibility on US trade and monetary policies, October started with an improved visibility on the Healthcare sector as a deal between the US administration and Pfizer could serve as a template for broader pharma reform.
• In Japan, the Q3 Tankan Survey showed an improvement in corporate sentiment, which would support the case for a less accommodative BoJ stance, even though Governor Ueda’s latest comments remained cautious.
• In the euro zone, flash estimates of consumer prices in September slightly rose, implying a status quo of the ECB in October.

Investment convictions

Core scenario

• United States: GDP growth slowing but with no recession expected over the next 18 months; inflation facing upward pressure by tariffs, but the Fed appears willing to look-through and enters a new easing cycle, with markets pricing in several rate cuts by end-2026.
• Europe: Growth resilience to be tested by the rise in US tariffs and political uncertainty in France. Bund yields are stabilising around 2.75% while the ECB preserves optionality to cut, supported by persistently low inflation expectations.
• China: Trade visibility improving somewhat, but frictions remain. External outlook supported by some tariff relief, while domestic policy remains accommodative through selective credit easing and fiscal support.

Risks

• Fed independence at risk: The “Trumpification” of the Fed through 2026 threatens to rupture past practice, with a more politically driven reaction function. This could steepen the yield curve, raise inflation premia, weaken the US dollar, support nominal earnings in the short term, and ultimately trigger an unpredictable bond market sell-off… potentially requiring a renewal in quantitative easing.
• European political instability: Weak cohesion and fiscal fragmentation risk to weigh on the region. Renewed political tensions and nationwide strikes have resurfaced in France.
• Bond market credibility test: A loss of confidence in fiscal discipline could drive long-term yields higher, renew volatility, and destabilise equities and credit markets.
• Geopolitical and policy fragmentation: Ongoing conflicts in Ukraine and the Middle East pose risks to global security, while diverging central bank paths and rising protectionism add to global policy fragmentation.

Cross asset strategy

• The Fed’s rate cut cycle signals a broader regime shift, supporting global equities via lower short-term rates, a weak US dollar and reflationary momentum. We hold a constructive stance on equities.
• Global equities:
  • Overall positioning is Overweight, led by a positive view on all regions.
• Regional allocation:
  • United States: Slight Overweight: The Fed’s dovish pivot sets the stage for further easing. US tech remains a core conviction amid slowing but resilient growth. Despite elevated valuations, the reflationary context favours upside.
  • Japan: Slight Overweight: Trade visibility and tariff relief continue to support cyclical sectors, especially exporters. Structural reforms and upcoming elections point to fiscal stimulus and stronger corporate returns.
  • Europe: Slight Overweight: Tariff relief offers support, and Germany’s expansionary budget has now been approved. The ECB is on hold but retains flexibility, with low inflation, potentially allowing room for policy action.
  • Emerging Markets: Slight Overweight: Emerging equities benefit from a softer USD and improved trade visibility. EM debt remains slightly overweighed, supported by attractive yields and lower funding costs.
• Factor and sector allocation:
  • We continue to favour resilient themes such as Technology & AI, European Industrials, and German Midcaps.
  • We hold exposure to US small- and mid-caps, which likely benefit from lower financing costs under a dovish Fed.
  • Healthcare remains supported as most of the bad news now appear discounted in the prices.
• Government bonds:
  • We are constructive on core European duration, where stable ECB policy and low inflation expectations anchor yields.
  • We hold a Short OAT / Long Bund as a hedge to protect against tail-risk of French political instability in the face of slippery public finances.
  • US Treasuries remain Neutral, with tariff-driven inflation and a Fed reshape adding complexity.
• Credit:
  • We prefer European Investment Grade credit, where spreads are attractive versus US credit.
  • High Yield remains less attractive in terms of risk/reward given tight spreads and limited risk premia.
  • Emerging Market debt is an Overweight on attractive yields, better trade visibility, and dovish Fed support.
• Alternatives:
  • Gold remains Overweight as a hedge against geopolitical risks, real rate volatility, and a weaker USD; supported by strong central bank buying and retail flows.
  • We retain allocations to alternative strategies for portfolio stability and diversification.
• Currencies:
  • We remain underweight USD, as Fed easing and political pressure weigh on the currency.
  • We favour defensive currencies such as the Japanese yen and hold selective long positions in EM currencies with strong fundamentals.

Our Positioning

We have become more constructive on equities in recent weeks, initially led by the US and Asia. While a more dovish US monetary policy will likely benefit most the US and Emerging markets, easing trade tensions should support the global outlook. Relatively good news on European activity and exports led us to slightly raise the exposure on the euro zone. In Europe, we emphasise Industrials and German mid-caps, while continuing to back resilient global themes such as Technology & AI and Healthcare. On the fixed income side, our strategy includes Emerging Market debt, supported by attractive yields, tariff relief, and improved investor flows. We also remain constructive on core-European duration while in credit we continue to prefer European Investment Grade over High Yield.