Coffee Break

Last week in a nutshell

• Geopolitical news dominated markets as concerns over the impact of new US sanctions on Russia oil saw Brent crude post a large jump, while the White House confirmed a meeting between Presidents Trump and Xi.
• The delayed September US inflation report was benign and should leave the Fed on track to cut rates twice this year. The White House suggested no CPI publication next month.
• The US government shutdown entered its fourth week, and both sides dug in and no clear off ramp is on the horizon, still implying few economic data releases.
• In Europe, flash estimates of Purchasing manager indexes picked up steam, led by an improvement in Services in Germany.
• Sanae Takaichi became Japan’s prime minister, making her the first woman to clinch the nation’s top political job.

Investment convictions

Core scenario

• United States: GDP growth slowing somewhat but with no recession expected over the next 18 months; inflation facing upward pressure by tariffs, but the Fed appears willing to look-through and has entered a new easing cycle. The government shutdown and more volatile market conditions have cemented the next cut at the end of October, with markets pricing in additional rate cuts by end-2026.
• Europe: Growth resilience to be tested by the rise in US tariffs and little domestic momentum. Bund yields are falling to the lower end of the range observed in H2 as the ECB preserves optionality to cut, supported by persistently low inflation expectations.
• China: Trade visibility is improving somewhat according to the latest trade balance release, but frictions remain. External outlook supported by some tariff relief, while domestic policy remains accommodative through 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. Political tensions have resurfaced and simmer 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: The ongoing conflict in Ukraine poses risks to European 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, a weak US dollar and reflationary momentum. We hold a constructive stance on equities.
• Global equities:
  • Our overall positioning remains Overweight, led by a positive view on all regions.
• Regional allocation:
  • United States: Slight Overweight: The Fed’s dovish pivot sets the stage for further easing. US tech remains a core conviction amid resilient growth. The earnings season will be an important marker.
  • Japan: Slight Overweight: Trade visibility and tariff relief continue to support cyclical sectors, especially exporters. The election of Sanae Takaichi is symbolizing structural reform and diversity in leadership and therefore seen as an important step to eliminate the discount on Japanese equities.
  • Europe: Slight Overweight: Tariff relief offers support, and Germany’s expansionary budget has now been approved. 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 favour a barbell approach with resilient themes such as Technology & AI, and Healthcare which remains supported as most of the bad news now appears discounted in the prices.
  • We keep exposure to German and US small- and mid-caps as they are still likely to benefit from expansionary budgets and lower financing costs under a dovish Fed.
• Government bonds:
  • We are constructive on core European duration, where stable ECB policy and low inflation expectations anchor yields.
  • 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 has a more limited risk/reward given tight spreads and low embedded 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 have taken some profits following the parabolic rise in recent weeks.
  • We acknowledge that the US dollar remains the key pivot for emerging markets and precious metals. Recent positioning on a weaker USD and stronger gold looks somewhat stretched.
  • 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

Investors will potentially get Mag 7 earnings beats, a US-China trade deal, Fed rate cuts and the start of the historically best weeks of the year. At the same time, sentiment remains relatively cautious as market volatility and political uncertainty have picked up during the past weeks. Our conviction remains therefore risk-on as fundamentals and technicals confirm a constructive outlook for equities, and the upward trend is likely to prevail by year-end. As a result, we now hold a balanced overweight allocation across the US, euro zone, Japan, and Emerging Markets. In Europe, we emphasise Industrials and German mid-caps as a catch-up trade, 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.