Coffee Break

Last week in a nutshell

• US president Donald Trump confirmed a bilateral summit with Putin was imminent, bypassing Zelenskyy, as Moscow faced a deadline to accept a ceasefire or face sweeping new US sanctions.
• Global equities closed mixed with the Nasdaq hitting a record high, as investors digested Trump’s aggressive tariff regime — including a 50% copper duty — and priced in rising odds of a Fed rate cut.
• The Bank of England cut rates to 4.0% in a split vote, while China’s July exports surged 7.2% and Japan’s BoJ minutes flagged cautious optimism amid tariff negotiations with the US.
• Stephen Miran, a White House loyal economic adviser, was nominated to temporarily fill a Federal Reserve Board seat, amid growing pressure for lower interest rates and tighter Fed oversight.

Investment convictions

Core scenario

• United States: The US economy is showing further signs of fatigue, with softer employment figures and weak ISM surveys pointing to a more fragile outlook. Inflation is projected to climb towards 4% in 2026, yet the Fed appears increasingly inclined to look past these price pressures, viewing them as largely temporary. With labour market resilience now in question — a key pillar of its dual mandate — the central bank seems to be shifting towards a more dovish stance, paving the way for rate cuts and a bull steepening of the yield curve.
• Euro zone: The euro area is showing signs of modest recovery, steering clear of recession while contending with new headwinds. As of August 1, a 15 % tariff now applies to most EU exports to the US, eroding competitiveness and clouding the region’s growth prospects. 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 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 caution and diversification.

Risks

• Weaker and converging economic signals: The gap between soft data (i.e. PMIs) and hard data (i.e., labour market indicators) is narrowing, as both now point to a loss of momentum. This convergence reduces the predictive value of early-warning indicators, increasing the risk that investors and policymakers — particularly in consumer-driven economies like the US—may underestimate how quickly growth is deteriorating. Trade truces offer some clarity, but elevated tariffs (2% to 17%) remain a drag.
• 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.

Cross asset strategy

• Global equities remain resilient, continuing to climb a "wall of worry" even as softer US data (ISM, labour) and renewed trade tensions fuel volatility. The market continues to hold its ground, but swings in sentiment highlight the fragile balance between risk appetite and persistent macro uncertainties.
• Global equities:
  • Positioning remains Neutral overall, with no significant regional bias despite the latest changes.
• 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 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.
  • We remain neutral on US equities, as valuations appear stretched. While a strong earnings season has supported headline growth, market breadth remains weak, revealing underlying fragility.
  • 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.
• Government bonds:
  • We are slightly constructive on duration in Europe, where ECB support and government stimulus continue to anchor yields.
  • 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

Global equities remain resilient, overcoming softer US economic data and renewed trade frictions while fixed income markets benefit from stabilizing forces. In Europe, supportive monetary policy underpins bond markets, while US dynamics call for greater selectivity and vigilance. This strength reflects a delicate balance between volatility and investor confidence, which continues to create selective opportunities despite persistent uncertainties.

Against this backdrop, we maintain a balanced positioning on equities, with cautious hedges in US and European markets, while continuing to favour resilient themes such as Technology & AI, European Industrials, and German Midcaps. In fixed income, we remain constructive on European duration, neutral on US Treasuries, and prefer European Investment Grade credit over High Yield, with selective exposure to EM debt.