Coffee Break

Last week in a nutshell

• President Trump announced steep duties to be applied to key allies including Canada, Switzerland, Taiwan and India. The move reignited global trade tensions and triggered a wave of volatility across markets.
• Beyond trade tensions, recent US data painted a weaker macro picture. Nonfarm payrolls rose by just +73K with sharp downward revisions to prior months, while the unemployment rate climbed to 4.2%. Final ISM figures also disappointed, reinforcing concerns about a broader loss of economic momentum.
• While Chair Powell reiterated a wait-and-see approach, recent soft labour and ISM data has increased the likelihood of a rate cut, reinforcing expectations for a more accommodative stance.
• Microsoft and Meta beat forecasts, while Apple posted its fastest sales growth since 2021 — though much of that was driven by pre-tariff stockpiling. In contrast, Amazon's results fell short, highlighting a notable divergence in performance among the tech giants.

Investment convictions

Core scenario

• United States: Growth momentum is fading as domestic demand and the labour market show signs of strain, pointing to a slower pace of expansion in H2 2025. While inflation remains above target, it is gradually moderating. The Trump administration’s push for its economic agenda is clouded by policy uncertainty — especially around tariffs and redistribution — sending mixed signals to markets and complicating the Fed’s monetary policy response. With the job market, a key part of the Fed’s dual mandate, now at risk, this increases the likelihood of an accelerated rate-cutting cycle.
• Euro zone: The euro area has shown modest growth, but the new US–EU trade deal adds pressure. A 15% tariff on most EU exports from August 1 avoids harsher measures but still weighs on competitiveness. The EU also committed to large US energy and defence purchases, though some targets seem unrealistic. While the deal reduces uncertainty and may support sentiment, its net impact is likely disinflationary and could drag GDP by 2026.
• China: Economic growth remains subdued but relatively stable. Persistent deflationary pressures and weak domestic demand continue to dampen sentiment. A trade agreement with the US is still pending negotiations, while structural weaknesses — such as industrial overcapacity and imbalances in the property market—persist. Ongoing policy support, through both monetary and fiscal measures, is expected to help prevent a deeper slowdown.
• Global growth is gradually decelerating, with increasing regional divergence. Inflation dynamics vary widely — persistent deflation in China, subdued inflation in Europe, and slowly moderating but sticky inflation in the US.

Our insight into the US-EU trade agreement

The EU and US have agreed to a trade deal establishing a 15% tariff on most EU exports to the US starting August 1, avoiding the threat of 30%+ tariffs. Critically, auto tariffs will drop from 27.5% to 15%, benefiting Germany and Italy, while pharmaceutical tariffs will remain at 0% until the ongoing Section 232 investigation concludes, with a potential cap at 15% from 2027. Some sectors—aircraft, semiconductors, select chemicals, and raw materials—will be exempt under a zero-for-zero tariff regime. However, steel and aluminum tariffs will remain at 50% for now, with potential exemptions for specific quotas to be negotiated in the future.  

Also, the EU committed over the next three years to $750bn in US energy and AI chip imports, $600bn in private investment, and "hundreds of billions" in US military equipment purchases. While these headline figures appear large, most reflect existing investment trends—though the energy target may be difficult (impossible?) to reach.

Ultimately, if the impact on the European economy will be material, we believe the deal reduces trade uncertainty and could boost European business sentiment in the near term. With the effective tariff rate at ~15% we believe it could weigh on EU GDP by -0.6% by 2026 and prove disinflationary over the near future. Following the ECB's recent interest rates decision and C. Lagarde's hawkish comments in the subsequent press conference, the ECB may wait to see clear signs of a slowdown in growth before cutting rates again.

This deal may also impact the US economy. While not getting back to April 2 levels, recent trade deals are clearly pointing toward a significant rise in the average effective tariffs rate on US imports. Consumer prices should eventually be pushed up, which will weigh on consumption and therefore on growth. As a result, the Fed is likely to postpone any rate cuts until there is more clarity on the inflationary effects of the current trade agreements.

Risks

• Weaker and converging economic signals: The gap between soft data (e.g. PMIs) and hard data (e.g. labour market indicators) is narrowing, as both now point to a loss of momentum. This convergence reduces the predictive value of early-warning indicators, increasing the risk that investors and policymakers — particularly in consumer-driven economies like the US — may underestimate how quickly growth is deteriorating.
• US trade and fiscal policy: The Trump administration’s evolving fiscal and trade agenda is generating sector-specific volatility, particularly in pharmaceuticals and base metals (e.g. copper). Some countries like Switzerland and Canada also face the imposition of steep, targeted duties creating new challenges for exporters. In the end, tariffs are expected to raise prices and weigh on consumption.
• Geopolitical tensions and policy fragmentation: Armed conflicts in Ukraine and the Middle East continue to pose risks to energy markets and global security. Meanwhile, divergent central bank paths and rising protectionism are adding to policy fragmentation.

Cross asset strategy

• The initial relief from the US-EU deal faded as weak US data (ISM, labour) and a new wave of sweeping tariffs — targeting close allies, and others — revived global trade concerns and market volatility.
• Global equities:
  • Positioning remains Neutral overall, with no significant regional bias despite the latest changes.
• Regional allocation:
  • The trade agreements with the EU and Japan have brought greater clarity, although their full economic impact will take time to materialize. In Japan, visibility has improved — particularly in sectors such as automotive — following the U.S–Japan tariff deal. While the agreement and potential fiscal stimulus under a potential new political leadership are supportive factors. We maintain our position in the Topix.
  • In Europe, the trade deal also provides a more predictable framework, but the economic impact is still uncertain and will need to be confirmed by upcoming data.
  • In the U.S., corporate earnings — especially among tech mega-caps — have been strong, but recent macroeconomic indicators are showing signs of weakness, encouraging a closer monitoring.
• Factor and sector allocation:
  • We focus on resilient themes such as Technology & AI, European Industrials, and German Midcaps, while acknowledging trade-related headwinds in areas like Pharma and Semiconductors.
• Government bonds:
  • We are slightly constructive on duration in Europe, where ECB support and government stimulus continue to anchor yields.
  • We are neutral on US Treasuries given the considerable uncertainty surrounding US inflation and growth. The impact of tariffs adds complexity.
• Credit:
  • In credit, we prefer Investment Grade — particularly in Europe — due to solid fundamentals, while remaining cautious on High Yield given tight spreads.
  • Emerging market debt benefits from positive real yields.
• 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 from traditional asset classes.
• In currencies, exchange rates will remain a focal point in trade discussions and broader market dynamics.
  • We remain constructive on defensive currencies, such as the Japanese yen, though we have recently taken partial profits on our JPY exposure. We continue to expect USD weakness as global growth slows.

Our Positioning

The initial optimism around the US-EU trade deal helped temporarily ease volatility but was short-lived. While US corporate provided strong earnings, economic data faced headwinds and showed weakness. In addition, The White House’s announcement of sweeping new tariffs — targeting Canada, Brazil, and others — rekindled global trade concerns and weighed on risk assets. Against this backdrop, we maintain a neutral stance on equities, with cautious hedges in US and European markets, while continuing to favour resilient themes such as Technology & AI, European Industrials, and German Midcaps. In fixed income, we remain constructive on European duration, neutral on US Treasuries, and prefer European Investment Grade credit over High Yield, with selective exposure to EM debt.