Current international relations are strained, both in terms of trade and geopolitics South Korea fired warning shots at North Korean soldiers who crossed the border before retreating, a day after Russian President Putin visited Pyongyang and sealed a partnership deal to deepen security and trade ties China warned against a possible trade war with the EU (EV imports)
On the macro front, the latest inflation figures for the US and Eurozone have reassured bond markets, leading to declining yields over the month Despite the Fed signaling only one cut in 2024 the mood among investors is growing more and more upbeat with positive Treasuries return We stick with the view that continued disinflation in the US and Europe should enable central banks to ease monetarypolicy even more in 2024
Financial market volatility remains low in spread products and stock markets
Major conviction : CAUTIOUS ahead of the summer lull and turbulent politics
1/ Continuing reassuring inflation figures and major central bank rate cuts:
It’s worth taking on interest rate risk through high quality bonds which offer an ample offset to potential equity volatility
In the US Favor quality credit and Cash (belly of the curve is expensive now)
In Europe Favor Capital structure and CrossOver credit (BBB/ on the front part of the curve, which largely compensate the negative roll down of sovereigns, although French elections could induce spreads widening
Emerging market corporate bonds also offer opportunities
2/ Global economy is normalizing, monetary policy easing has begun and companies are delivering earnings and managing their balance sheet :
We remain globally positive on the EU and US equity markets although current valuations and idiosyncratic risks deserve some cautious stance
Due to the performance concentration on Tech, we recommend to diversify within US equities with Tech growth normalizing now Improving global growth should benefit to Cyclicals
Political event risk is back on the fore front we still expect concerns about the US elections to start negatively impacting equity markets by late summer while Europe will try to digest the French political crisis
The closer we get to lower interest rates, the more we’ll have to diversify into the emerging markets (interesting story on commodities, especially industrial metals and Latin America)
Commodities will continue to be supported by the sustainability transition, continuing AI development and geopolitical tensions, especially industrial metals Demand from emerging central banks diversifying their reserves is supportive for Gold
Currencies wise, the US Dollar will maintain its safe haven status in a context of continuing geopolitical tensions while offering yield advantage versus the other developed countries The CHF will continue to benefit from the political turbulences in Europe
