Coffee Break

Last week in a nutshell

• The "Big Beautiful Bill", a $3.4Tn fiscal package, passed the US Congress, boosting sentiment despite longer-term deficit concerns.
• The June US job report surprised on the upside with 147k new jobs and a drop in unemployment to 4.1%, tempering expectations for a July Fed rate cut.
• PMI data for the euro zone showed modest improvement, with the composite touching three-month highs amid stabilizing manufacturing and growing services activity.
• At the ECB’s Sintra Forum, central bankers emphasised vigilance, highlighting uncertainty around trade and growth dynamics.
• In Japan, the Q2 Tankan survey beat expectations with large manufacturers’ confidence improving, and industrial production data showed resilience even amid trade headwinds.

Investment convictions

Core scenario

• The global economy remains fragile, with growth expected to slow further amid lingering trade tensions, and ongoing uncertainty over oil prices driven by the Israel-Iran conflict, increased OPEC+ output, and weakening Chinese demand.
• United States: Growth is trending lower and inflation risks remain as tariffs loom large, making the US dollar, hard data releases, and corporate profit growth key to watch.
• Europe: With growth holding up and inflation under control – mission accomplished for the ECB – attention has turned to fiscal policies aimed at mitigating broader growth risks.
• China: Growth remains constrained with little sign of acceleration and deflation persists, amid ongoing pressure from its trade confrontation with the US.

Risks

• US trade policy: Although there are signs of de-escalation, uncertainty surrounding US tariffs persists. Visibility remains very limited. Market sentiment is fragile and volatility could resurface at any time, in particular around the end of the 90-day pause of US reciprocal tariffs on July 8^th.
• Noise in the macro data: Economic growth is slowing, but the picture is murky. The unsustainable gap between soft and hard data has started to close: hard data is weakening, following soft data downwards.
• Armed conflicts in Ukraine and the Middle East: These are impacting oil prices, the broader energy sector, NATO cohesion, and relations with the United States.

Cross asset strategy

1. With recession fears easing despite tariff uncertainty, the comeback of US Tech leadership, and the validation of President Trump’s "Big, Beautiful Bill", financial markets got a boost.
2. Global equities:
   • Our cautiously optimistic stance remains measured: Renewed trade tensions and tariff hikes scheduled for early July present meaningful risks to global growth and corporate margins. Hence, positioning remains Neutral overall, with no particular regional bias.
3. Regional allocation:
   • We increased our exposure to US tech and US equities, capitalising on the technical breakout signal of the Nasdaq index and the renewed leadership of the tech mega caps ahead of the Q2 earnings season.
   • Europe and Emerging Markets, while more exposed to trade tensions, could be supported by more attractive valuations and stronger fiscal responses, offsetting tariff-related headwinds.
4. Factor and sector allocation:
   • In this environment, we put an emphasis on well-diversified factors over strong directional bets.
   • The strategy is overweight Global Technology due to AI-driven structural growth.
   • Our views are positive on German midcaps, European infrastructure and defence, supported by fiscal expansion.
5. Government bonds:
   • European sovereign bonds continue to benefit from growth concerns, subdued inflation expectations, and the ECB’s supportive stance. In a multi-asset portfolio, they add valuable decorrelation and serve as a defensive anchor in the event of renewed market volatility.
   • The Fed has more time to hold rates steady and focus on how inflation is developing: We are Neutral on US Treasuries
6. Credit:
   • In credit markets, we maintain a preference for Investment Grade bonds over High Yield ones, and favour European credit over those in the US. Investment Grade remains a resilient asset class with strong fundamentals, particularly in European credit, where US versus European spreads have returned to negative levels.
   • High Yield spreads have tightened significantly, offering little risk premium, so we keep a cautious stance with a slight underweight on both US and European high-yield bonds.
   • We have an allocation to emerging markets debt, after a slight upgrade to neutral. The asset class benefits from positive real regional yields, potential support from a weaker US dollar, and the potential easing of tariffs.
7. 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 amid ongoing volatility.
8. In currencies, exchange rates will remain a focal point in trade discussions and broader market dynamics.
   • We are overweight defensive currencies (e.g., Japanese yen) and expect USD weakness as growth softens.

Our Positioning

We somewhat increased our exposure to US tech and US equities, capitalising on the technical breakout signal of the Nasdaq index and the renewed leadership of the tech mega caps ahead of the Q2 earnings season and Congress’ adoption of the “Big beautiful bill”.

Our cautiously optimistic stance, however, remains measured: renewed trade tensions and tariff hikes scheduled for early July still present meaningful risks to global growth and corporate margins.

Therefore, we remain focused on a thematic selection (e.g., US Technology, German mid-caps, European infrastructure and defence) and regionally well diversified, balancing upside participation with geopolitical caution.

In fixed income, we favour Investment Grade over High Yield, with a preference for the resilient European credit segment. Alternatives continue to provide portfolio stability, with gold retained as a strategic hedge against ongoing asymmetric risks and a weaker US dollar.