Coffee Break

Last week in a nutshell

• US growth remains decent as initial jobless claims fell back further, and orders of nondefense capital goods ex-aircraft (so-called "core" orders) climbed 0.6% in August.
• Geopolitical tensions rose as repeated Russian incursions in NATO airspace were said to be a response to Ukrainian attacks on Crimea which would not have been possible without NATO support. The price of Gold surged to a new record high.
• While EU countries planned a €140bn 0% loan to help defend Ukraine, the US discussed a $20bn swap line with Argentina.
• The German ifo business climate deteriorated somewhat in September. Accordingly, prospects for an economic recovery have suffered a setback right at the moment when lawmakers discussed the adopted expansionary 2026 budget.

Investment convictions

Core scenario

• United States: GDP growth slowing to 1–2% 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 energy markets and 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 and 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 the US, Asia, and Emerging Markets. Japanese equities remain a key conviction following our upgrade this summer.
• 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: 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: Neutral: Tariff relief offers support, but political uncertainty in France and fiscal fragility limit conviction. 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

The US administration has enacted a new trade deal with the EU, cutting tariffs on most imports from 25% to 15%, retroactive to August 1. The move benefits notably automotive and industrial manufacturing and follows a July framework to ease transatlantic tensions. Further, the European Commission noted that US tariffs on EU exports remain under a 15% all-inclusive tariff ceiling, clarifying that US President Donald Trump’s newly announced pharmaceutical tariffs will not apply to the EU above the 15% limit.

We have become more constructive on equities in recent weeks, 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 exports led us to slightly raise the exposure on the Euro area via derivatives. 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.