Coffee Break

Last week in a nutshell

• US markets celebrated the Economic Policy Symposium in Jackson Hole as equities rose, and volatility declined. Notably, the VIX volatility index fell below 15 points on five consecutive days following the central bankers’ gathering.
• French PM François Bayrou announced a confidence vote on 8 September, adding to political uncertainty and weighing on French assets.
• While Nvidia earnings did not reveal major surprises, other Tech bellwether names like Dell and Marvell disappointed expectations.
• July core PCE inflation, slightly below 0.3% MoM, was in line with expectations, thereby reinforcing the likelihood of a Fed rate cut on 17 September.

Investment convictions

Core scenario

• United States: Comments in Jackson Hole confirmed that labour market resilience is now in question - a key pillar of the Fed’s dual mandate – and the central bank is shifting towards a more dovish stance, paving the way for rate cuts as soon as September and a bull steepening of the yield curve. Inflation is on track to climb towards 4% in 2026, yet the Fed appears increasingly inclined to look past these price pressures, viewing them as largely temporary.
• Euro zone: The euro zone is showing signs of modest recovery, steering clear of recession while contending with new headwinds. A new 15 % tariff now applies to most EU exports to the US. Inflation remains comfortably within the ECB’s target zone, bolstering the rationale for keeping the policy rate unchanged. While the ECB remains on hold, it retains the flexibility to cut rates if the growth outlook deteriorates further.
• China: Growth remains subdued but stable, with ongoing US trade talks and persistent deflationary pressures. Weak domestic demand and structural challenges keep the PBoC in a supportive stance, aiming to prevent a deeper slowdown.
• Global: Global growth is gradually slowing, with widening divergences across regions and a mixed, but overall, still resilient, economic picture. Inflation trends remain uneven: Persistent deflation in China, stable in Europe, and edging higher again in the US. Elevated uncertainty, particularly around trade policy and stagflation risk, continues to call for diversification.

Risks

• US trade and fiscal policy: The Trump administration’s evolving fiscal and trade agenda is generating sector‑specific volatility, particularly in pharmaceuticals and base metals (i.e., copper). Countries such as China, India and Switzerland face the prospect of steep, targeted duties, creating new challenges for exporters. In the end, tariffs are expected to raise prices and weigh on consumption.
• 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.
• European political uncertainty: French political instability picked-up again as Prime minister François Bayrou called a confidence vote for 8 September, just ahead of a major strike on a national level.

Cross asset strategy

• Global equities enter the month of September supported by hopes of earlier-than-expected Fed rate cuts.
• Global equities:
  • Positioning remains Neutral overall, with some tactical regional tweaks given the latest developments.
• Regional allocation:
  • The trade agreements with the EU and Japan under the Trump administration have brought greater clarity and a relatively favourable outcome, despite significant compromises.
  • In Japan, the trade deal improves visibility - particularly for cyclical sectors such as automotive - while the economy continues to benefit from structural reforms and inflationary tailwinds. With potential elections on the horizon and the likelihood of associated fiscal stimulus, we maintain a neutral stance but have marginally increased our exposure to reflect this supportive environment.
  • Europe benefits from tariff relief, but the economic impact remains uncertain and will need confirmation from upcoming data. Political uncertainty in France represents a risk for the region.
  • We remain neutral on US equities, but we strengthened protection at a cheap volatility level.
  • We retain a neutral position in Emerging Market equities, as uneven growth dynamics are compounded by escalating US-India trade tensions and lingering uncertainty over US-China tariff negotiations.
• 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. More recently, we added to US small caps who are attractive in a more dovish Fed scenario.
• Government bonds:
  • We are slightly constructive on duration in Europe, where ECB support and government stimulus continue to anchor yields.
  • We decided to keep a Short OAT / Long Bund exposure to hedge against the renewed pick-up in French political instability.
  • We are neutral on US Treasuries given the considerable uncertainty surrounding US inflation and growth. The impact of tariffs adds complexity.
• Credit:
  • In credit, we prefer Investment Grade - particularly in Europe - as spreads look particularly attractive compared to US credit. They have returned to early 2025 levels.
  • We remain cautious on High Yield due to its expensive valuations and lack of sufficient risk premium, offering little protection against potential negative surprises.
  • Emerging market debt should benefit from more visibility on the tariffs front and positive real yields.
• 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.
• In currencies, exchange rates will remain a focal point in trade discussions and broader market dynamics.
  • We remain constructive on defensive currencies, such as the Japanese yen, though we have recently taken partial profits on our JPY exposure. We continue to expect USD weakness as global growth slows.

Our Positioning

US markets celebrated the Economic Policy Symposium in Jackson Hole as equities rose, and volatility declined. Notably, the VIX volatility index fell below 15 points on five consecutive days following the central bankers’ gathering. It has printed only 12 days below that level in 2025, nine of them in August. Volatility is expected to pick up in September, the month suffering the least favourable seasonality.

We welcome the opportunity to reduce exposure to US equities and strengthened protection at a cheap volatility level. We also added slightly to our holdings in Emerging market debt, as more dovish US monetary policy provides a tailwind. Finally, we decided to keep our Short OAT / Long Bund exposure to hedge against the renewed pick-up in French political instability.

Overall, we maintain a balanced positioning on equities, with some tilts towards mid-caps in the US and in Germany, while continuing to favour resilient themes such as Technology & AI and European Industrials. In fixed income, we remain constructive on core-European duration, while trimming duration slightly as short-term potential for declining yields in the region has fallen. We remain neutral on US Treasuries, and prefer European Investment Grade credit over High Yield, with selective exposure to EM debt.