Deal or no deal, prepare for a volatile summer

Global equities reached new record levels in July on expectations of trade deals, easing of US tariff threats and hopes of a short-term boost to US growth from the One Big Beautiful Bill Act (OBBBA). This has happened despite US tariffs moving higher (when compared with before Trump came to power), indicating some complacency in risk assets. On the other hand, bond yields in the US, the UK, Europe, and Japan are reflecting concerns over debt sustainability.

We think that, with so much uncertainty over policies, any good news regarding the economy and decisions on tariffs, such as the one with Japan, is being welcomed by the markets. However, Trump’s transactional approach will persist even after agreements with trading partners are finalised. This policy uncertainty is perhaps most evident in the USD.

 

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Monica Defend

Monica Defend

Head of Amundi Investment Institute

The rosy scenario priced in the markets ignores any volatility stemming from Trump following through on his tariff threats, which may weigh on US growth.

Monica Defend, Head of Amundi Investment Institute

Balance carry and quality in credit

investment

Balance carry and quality in credit

US macro data is holding well, and due to declining inflation, central banks such as the ECB and the BoE are on an easing trajectory. Even the Fed will eventually resume easing. At the same time, our base case is one of no recession in the US and Europe. However, exacerbated by uncertainties around international trade, growth will likely slow down. The fiscal lever becomes important in this context, with its aim to boost spending and security ambitions for instance in Germany.

This implies that the pressure on the long end of the curve will persist, creating steepening opportunities. Another key area to enhance income is carry in credit. We prefer to do this through the quality segments better equipped to withstand pressures from the economy and geopolitics.
 



 

 

Focus on resilient market segments

While markets reached record levels in July, the returns this year have been driven by a handful of stocks in the US, as well as in Europe. This increases concentration risks, but on the other hand, it signals that there are market segments that have lagged behind. We are on the look-out for such segments and believe the main push to these businesses could come from how well they are able to maintain earnings resilience.

In addition, even though valuations in Europe are better vs. the US, the big question is how these valuations can be sustained in the face of tariff risks. And if volatility persists, our approach will be to focus on selection and diversify away from expensive areas in the US. We also aim to take advantage of such volatility with a focus on balance sheet strength of companies for example in Japan and Europe.
 


 

Focus on resilient market segments

stacking coins

EM strength tested by trade volatility

GIV MAY EM

EM strength tested by trade volatility

Global trade has remained strong in the first half of the year, and we’ve witnessed front-loading in exports to the US because of tariffs. Looking ahead, stronger EM growth (vs. DMs) will likely persist amid a generally contained inflationary backdrop, but tariff-related newsflow with respect to any US trade deals with EMs (for instance with Indonesia) and new announcements by the US could create volatility.

Hence, trade deals are important but we also take into account market liquidity, domestic consumption environment and the fiscal strength of these countries to form our views across EMs. For instance, while we are seeing that Chinese GDP growth was better than expected and indicates the country may meet government’s growth target this year, domestic consumption issues persist.
 

Positive on risk, mindful of Trump factor

Even as US economic activity is decelerating, there are many sources of volatility coming from trade, consumption and Trump’s policies on tariffs. On the other hand, the recently approved OBBBA and any resilience in US data could provide a near-term fillip to risk assets. In the Eurozone (EZ), growth will be heterogeneous and supported by the German fiscal boost. With this in mind, we maintain our slightly constructive stance on risk assets, but acknowledge the need for dynamic protections and fine-tuned our FX views.

Positive on risk, mindful of Trump factor

GIV May Multi asset

Changes vs previous month

  • Fixed income: neutral on duration overall.

  • Multi asset: We see a greater need for strengthening hedges on US equities. In addition, we refined our FX views but remain cautious on the USD. In EM, we downgraded AUD/TWD.

  • FX: slightly cautious on the GBP, and less pessimistic on CNY.

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