Coffee Break

Last week in a nutshell

• The US labour market surprised on the upside, with August payrolls rising fast, pushing the probability of a September Fed hike above 50%, while Canada unexpectedly shed 42k jobs.
• The Fed debate became less clear-cut, as Governor Waller tied September closely to August CPI, somewhat contrasting with Chair Warsh’s earlier insistence that inflation is not slowing meaningfully and the Fed still has work to do.
• Elsewhere, the hiking bias broadened, as BoE Chief Economist Pill called for a prompt rate increase, Swiss inflation surprised higher and the RBNZ delivered a second consecutive 25bp hike.
• Geopolitical tensions intensified again, as renewed US strikes on Iran and the naval blockade kept Persian Gulf oil flows constrained and Brent above USD90/bbl.
• Trade tensions also resurfaced, with the G20 finance chiefs’ meeting ending in an acrimonious US-China clash over trade practices.

Investment convictions

Core scenario

• Slight Overweight Equities: We remain constructive for global equities.
• Macro conditions set to improve, but fragile. Macro conditions are supportive in the US and could further improve in the rest of the world if energy prices decline. US growth continued to rest on private domestic demand, with investment – especially AI-related capex – playing a large role. However, ongoing tensions in Iran pose a risk to our scenario.
• An activist US Treasury policy. Beyond the immediate market reaction, the move adds to unease around an increasingly activist Treasury and, more broadly, the US policy mix.
• Global monetary policy divergence. The Fed remains on hold for the moment while the ECB is managing inflation expectations, signalling potential ongoing rate hikes.Finally, the Bank of Japan remains in tightening mode.

Risks

• Geopolitical fragmentation. The US–China rivalry remains entrenched, while energy supply and global trade patterns continue to shift.
• Ongoing tensions in Iran. A resolution is paramount for our core scenario to hold. In the meantime, the situation in Iran remains very fragile and volatile.
• Fed dilemma. A resilient economy and divisions within the FOMC could lead to monetary tightening. Kevin Warsh will have to build a new policy consensus.
• Fiscal credibility. Rising issuance and political noise could test bond market confidence and trigger volatility in yields.

Cross asset strategy

• We are slight overweight on equities via regional preferences of Emerging markets and Japan, while holding a neutral stance on the US and Europe.

Regional allocation:

• Neutral United States. This stance reflects our neutral stance on the US Technology sector as Tech-sensitive exposures carry roughly half of the weight in the broad US market.
• Slight overweight Japan. Supportive government initiatives and a relatively prudent BoJ provide a favourable backdrop for risky assets. Also, its world-leading franchises in robotics, factory automation and industrial equipment should position the market to benefit from the next phase of AI-driven productivity growth.
• Neutral Europe. The region could benefit from easing energy prices if tensions in the Middle East decline, but sector composition appears less exposed to dominant market themes. Fiscal spending in Germany is kicking into full gear.
• Slight overweight Emerging markets. A selective approach within the region is warranted, but the overall strong exposure to Tech is a supportive though volatile factor. Valuation is attractive as the relative 12m forward PE of the MSCI Emerging Markets index reveals a significant discount to the MSCI World index.

Factor and sector allocation:

• We favour themes that benefit from long-term investment cycles.
• We remain constructive on the Healthcare sector and keep exposure to EU and US mid-caps and some industrial stocks as they are shielded thanks to expansionary budgets and planned deregulation.

Government bonds:

• We are long Core European Bonds duration. The Iran war has led to an inflation-driven repricing. As a consequence, ECB central bank expectations have been cemented into rate hikes. We focus on high quality, core-European AAA-rated sovereign bonds, which enjoy both fiscal and central bank credibility.

Credit:

• Spread widening in European Investment Grade has been very limited, insufficient to create a broad valuation opportunity while macro uncertainty remains elevated. Investment Grade fundamentals remain solid, but sensitivity to higher rates warrants a neutral positioning. For the moment, we favour maintaining selectivity rather than holding an overweight position.
• Neutral on Investment Grade credit in both the US and Europe. High Yield technicals are deteriorating amid outflows and increasing supply. Within High Yield we’re neutral on Europe and negative on the US.
• We are positive on Emerging market debt via Sovereign Local Currency debt as the spread tightening trend is unfolding again and there is some leeway to see further compression ahead. Also, EM FX appears best placed to benefit from renewed potential USD weakness. In addition, the current Yield-to-Maturity of ca. 7% represents an attractive carry for this income-diversifier position.

Alternatives:

• We remain constructive on gold as the precious metal rebounded strongly from the important 4,000 USD/oz support since end-July.
• We hold precious and strategic metals, alternatives and market-neutral strategies for portfolio stability and diversification.

Currencies:

• The current market regime favours currencies linked to commodities. Therefore, we have long positions in AUD.
• We remain slightly underweight on the USD and are long JPY.

Our Positioning

Renewed hostilities between the US and Iran reversed the previous week’s geopolitical easing and pushed energy prices up. In the beginning of the week, markets additionally had to digest the more hawkish tone set at Jackson Hole and the strong job report. Our positioning remains constructive as global activity remains resilient, with a slight overweight in equities through Emerging Markets and Japan. Overall, the macro backdrop remains supportive allowing market leadership to broaden. In fixed income, we favour Emerging Market debt and are constructive on high quality, core European duration. Within credit, we prefer European Investment Grade over High Yield, where risk premia remain limited. We maintain a preference for the Japanese yen as a hedge, which remains historically extremely undervalued compared to the US dollar, selected emerging-market currencies and keep commodity-linked currencies such as AUD. Finally, gold, strategic metals and alternative strategies continue to play an important diversification role in a world of supply constraints, policy divergence and real-rate volatility.