Coffee Break

Last week in a nutshell

• US employers added more jobs than expected for a second month in a row despite rising energy costs. This release follows rather strong JOLTs, ADP and weekly jobless claim data.
• The global composite PMI new orders index rose in April from a two-and-a-half year low, driven by a rise in China and EM more broadly and partly offset by a further decline in the euro zone.
• Regarding central banks, the 25bp hikes of the Reserve Bank of Australia and the Norges bank fuelled further gains in the Australian dollar and the Norwegian krona.
• UK government bonds rallied as Prime Minister Keir Starmer vowed to remain in his job despite his party’s election losses.

Investment convictions

Core scenario

• Tactical neutrality: With negotiations ongoing and a ceasefire in place and lengthened, there’s room for markets to relax.
• Monitoring the situation in the Middle East closely. We are ready to re-engage with risky assets as medium-term oil prices and rate pressures stabilise.
• Ahead of the start of the Iran war, a supportive macro context. Macro conditions remained supportive until early-March but are no longer the dominant driver of market leadership. US growth continued to rest on private domestic demand, with investment – especially AI-related capex – playing a larger role than consumption.
• Back to fundamentals. Markets have shifted attention back to corporate profit growth as the Q1 earnings season is on a solid footing thanks to upgraded earnings expectations, led by Technology, Energy and Basic Materials.
• Monetary policy ambiguity. A Federal Reserve easing now seems conditional on the evolution of energy prices – we think the Federal Reserve is likely to look through the shock. The ECB will have to manage inflation expectations: at its latest meeting, the central bank opted to hold interest rates steady at 2%, signalling a potential rate hike this summer. Finally, the Bank of Japan and the Reserve Bank of Australia remain in tightening mode.

Risks

• Iran war. The duration of the war and the effective closure of the Strait of Hormuz, the diffusion towards other countries and beyond energy commodities to soft commodity prices, and the damage to the energy infrastructure in the region represent the key risks for the growth / inflation mix, notably for energy-importing countries.
• Geopolitical fragmentation. The US–China rivalry remains entrenched, while energy supply and global trade patterns continue to shift.
• Fed dilemma. The oil shock and a divided FOMC could delay further easing, risking a pause in liquidity support. There is a risk that tariff-related price gains together with energy price related pressure, could lead to some inflation increases over the coming months.
• Fiscal credibility. Rising issuance and political noise could test bond market confidence and trigger volatility in yields.

Cross asset strategy

• We are tactically neutral on equities while the ceasefire persists and negotiations are ongoing.
  • Our overall positioning is Neutral, but we are ready to re-engage with risky assets as medium-term oil prices and rate pressures stabilise.
• Regional allocation:
  • The United States remain relatively more insulated thanks to domestic energy production and still-resilient private demand. Attractive Tech valuations represent a support for the stock market.
  • Japan faces structural energy import dependence, but a supportive government policy.
  • Europe suffers acute exposure to Middle Eastern oil and LNG dynamics and vulnerability to renewed headline inflation. On the other hand, fiscal spending is kicking into full gear.
  • Emerging markets is one of the best performers, but the region is also vulnerable to higher oil prices and a rising USD. In case of a negotiated peace agreement, this sentiment could quickly reverse.
• Factor and sector allocation:
  • We remain constructive for both Technology and Healthcare. Within the software sector, a large dispersion of business models exists, some of which are more impacted by Artificial Intelligence than others.
  • We keep exposure to EU and US mid-caps and industrial stocks as they are somewhat shielded from expansionary budgets and planned deregulation.
• Government bonds:
  • We are neutral on core European duration and are monitoring an attractive entry point.
  • US Treasuries remain Neutral, with the upcoming Fed reshape adding complexity.
• 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.
  • Emerging Market debt is neutral. Emerging markets face a challenging backdrop of higher yields and rising volatility, but the US dollar is no longer strengthening and real yields are attractive. Hence, a neutral stance on both EM local debt and corporates is warranted.
• Alternatives:
  • We remain constructive on gold over the long term.
  • 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 such as precious metals and oil. Therefore, we have long positions in AUD, NOK and BRL.
  • There is an increased potential of a better relationship with the EU for Hungary which could lead to more stable policies and therefore a meaningful reduction of risk for foreign investors, leading us to hold a position in the Hungarian Forint.
  • We remain underweight on the USD but have reduced this underweight materially on renewed geopolitical escalation.
  • We are also long JPY.

Our Positioning

Global markets were up last week, but equities struggled to build on recent gains as geopolitical headlines again dominated sentiment. Hopes of progress toward a US-Iran peace deal supported risk appetite and pushed the price of oil below $100/bbl, but renewed tensions later in the week lifted crude prices again and kept investors cautious. Earnings remained an important support, particularly in parts of technology and even software, though broader leadership was less convincing. We are currently tactically neutral on equities. The current ceasefire is a significant first step, allowing markets to catch a breather and diplomatic initiatives to be worked out. We remain prepared to act quickly in either scenario: further de-escalation, or a resumption of the war. In giving peace a chance, the outcome of the negotiations is de facto binary. In fixed income, we are neutral on core European duration and on global bonds in general.