Coffee Break

Fed independence in the spotlight

Coffee Break:
  • Settimana

Last week in a nutshell

  • The US economy added more-than-expected jobs in April while the unemployment rate stayed at 4.2%.
  • China reaffirmed support for existing stimulus policies, focusing on employment and vulnerable sectors, and signalled willingness to discuss trade with the US.
  • The US and Ukraine signed a landmark minerals agreement, shifting US support from military aid to long-term investment.
  • Microsoft and Meta beat expectations with strong AI-driven results, while Amazon impressed but showed slower AWS growth.
  • Mark Carney’s Liberal Party won the general election in Canada, forming a minority government amid voter concerns over US relations and economic stability.

What’s next?

  • The Fed and Jerome Powell’s press conference will be in the spotlight. Markets expect no change in rates, but any shift in tone – especially regarding inflation risks tied to the US trade policy – could jolt expectations for H2 2025.
  • Central Banks will also meet in Europe as the BoE, Riksbank, and Norges Bank hold meetings. While consensus expects the BoE to cut rates by 25bps, Sweden and Norway are likely to hold steady.
  • Trade figures from the US and China will provide timely insights into global demand resilience amid a shaky geopolitical backdrop. Investors should brace for market reactions as the data is likely to test growth sentiment.
  • In Germany, the Bundestag is expected to vote on whether Friedrich Merz will become Chancellor on May 6 and start the new CDU-led government coalition.
  • China's President Xi and Brazil's President Lula are expected to attend WWII Victory Day celebrations in Moscow.
  • Investors will also focus on the OPEC+ meeting on production with the price of crude oil futures dropping towards $60/bbl in recent days.
  • A major week for earnings starts again with publications from industry bellwethers like Berkshire Hathaway, Palantir, Novo Nordisk, and Disney. Investors will scan commentary for macro signals – from consumer trends to AI monetisation and tariff impacts on business.

Investment convictions

Core scenario

  • Higher tariffs and rising uncertainty, coupled with weaker growth will likely weigh on consumer spending, corporate investments and asset valuations.
  • In the US, growth is weakening under the weight of self-imposed tariffs, while inflationary pressure is rising, hampering the Fed’s ability to cushion the blow. Outside of the US, the hit from tariffs to growth should also be felt.
  • Europe somewhat mitigates the negative impact thanks to fiscal support and diversified trade ties, and the monetary easing from ECB which still has some space to cut rates as inflation recedes.
  • China’s fragile recovery is challenged by deepening deflation and massive retaliation in the trade conflict amid rising geopolitical tensions.

Risks

  • Growth fears are significant as tariff announcements reshape monetary policy expectations, highlighting the growing strain on global financial markets, supply chains and the economic outlook.
  • The corporate sector faces major disruptions and uncertainty due to tariff barriers, leading to production and investments delays while lowering profit margins.
  • Tariffs are being used as tools for revenue generation, national security, and geopolitical leverage—raising the risk of prolonged trade tensions and structural damage to international cooperation and supply chain resilience.
  • As the US-China confrontation escalates – with tariffs at the centre – global risks intensify, and the question remains: who wants to deal in Mar-a-Lago when confrontation, not cooperation, sets the tone?

Cross asset strategy

  1. In an uncertain context of tariff fear and relief, we note that lower bond yields, a lower USD, and a lower price of oil are easing financial conditions and acting as a macro stabiliser. All these developments have led to a rebound in financial markets and support our still prudent stance, though we are now less underweight than a month ago.
  2. Global equities:
    • Our positioning is slightly underweight equities.
  3. Regional allocation:
    • We favour ex-US equity markets.
    • We are neutral on the UK equity market.
    • We are slightly negative on the euro zone and Emerging Markets equities. The euro zone faces a delicate balance between fiscal stimulus and trade tensions, while Emerging Markets - especially China - are directly in the line of fire of the escalating trade conflict.
    • Japan’s structural tailwinds are noted, but the strength of the yen and trade pressures could undermine near-term upside.
    • We are cautious on US equities, where both valuations and earnings growth assumptions face downside pressure. The erratic tariff rhetoric threatens the long-standing US exceptionalism narrative, putting further strain on equity multiples.
  4. Factor and sector allocation:
    • In this environment, our equity positioning remains defensive, favouring low-volatility and quality factors over cyclical or growth exposures.
  5. Government bonds:
    • Our government bond strategy is constructive, but limited to Germany and core Europe, where we are long duration, supported by falling inflation and expectations of additional ECB easing. Despite volatility in sovereign spreads, European yields remain attractive and provide valuable diversification in multi-asset portfolios.
  6. Credit:
    • We hold a neutral stance on Investment Grade credit, recognizing the strength of corporate fundamentals but acknowledging that a broader “risk-off” mood is capping upside.
    • We are negative on the high yield segment as spreads have tightened again while sentiment remains fragile in the face of policy uncertainty.
    • In the ongoing uncertain and risk-off environment, we are also negative on Emerging Markets debt. While real yields are regionally attractive and a weaker USD could help, the combination of slowing global growth and intensifying trade tensions calls for greater caution.
  7. Alternatives play a crucial role in portfolio diversification:
    • We continue to see value in alternative assets—notably precious metals such as gold and silver, which remain effective hedges in an environment of heightened volatility and trade uncertainty.
  8. In currencies, exchange rates will remain a focal point in trade discussions and broader market dynamics:
    • We have a positive view on the Japanese yen, which we see as a likely beneficiary of increased risk aversion.
    • Tariff announcements, coupled with uncertainty from political leadership and confrontational foreign and economic policies, have raised doubts about the long-term attractiveness of the US dollar. We have a negative view on the currency.

Our Positioning

Our positioning remains prudent, but we acknowledge easing financial conditions and tactical opportunities. In equities, we continue to favour regions outside the US, where the cyclical setup remain more attractive. In fixed income, we retain a preference for duration through German government bonds and stay highly selective in credit.
Until macro and policy visibility improves meaningfully, staying risk-aware and nimble remains the wisest course.

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