Tariffs and fiscal policy, the moment of truth

Mounting concerns over large US fiscal deficits, along with consumers’ inflation expectations and the escalating conflict in the Middle East, have started moving the markets. The issues around fiscal sustainability were further aggravated by President Trump’s Big Beautiful Bill, the renewed interest in fiscal expansion in Europe (including German borrowing plans), and Japanese debt auctions. Long-end bond yields rose in response, but equities showed some resilience.

Looking ahead, we could see some signs of weakness. Barring an escalation of the Israel-Iran conflict, markets will now focus on fiscal risks and tariffs. The big question is whether the allure of US assets is diminished by the fiscal issues, the challenge to the status quo by the US administration’s policies, and how that could affect US assets.

We could very well see these old patterns changing in the future, but it is a long-term trend, not something that will happen within a short time frame. For now, trust in US institutions and their credibility remains intact – it may be questioned at various stages though. 

Image
Monica Defend

Monica Defend

Head of Amundi Investment Institute

The traditional safe haven stature of the USD will be challenged in an era of rising deficit and debt.

Monica Defend, Head of Amundi Investment Institute

Curve steepeners are the way forward

investment

Curve steepeners are the way forward

Inflation is easing in developed markets, though tariff effects are still unfolding. Meanwhile, high government debt and spending bills risk pushing yields higher. For instance, the Big Beautiful Bill is feeding concerns over bond vigilantes, particularly at the very long end of the yield curve.

In this fluid environment, we maintain an overall positive and agile duration stance and see curve steepening opportunities in the US and Europe. But regional and tactical nuances require flexibility across the spectrum. Fundamentals in corporate credit are strong, but some deterioration is possible on the low-quality side if growth disappoints. We favour names with strong capital buffers, and less affected by changes to the economic cycle.



 

 

Prioritise valuations and quality

Equities have been resilient so far this year, with Europe outperforming the US, as the full impact of tariff policies has yet to be felt. Corporate forward guidance indicate that the impact of tariffs is still not clear. While some companies with pricing power will be able to raise prices once the impact of tariffs are felt, other will not. This differentiation will be crucial in deciding the impact on margins.

In addition, we think, European market performance so far has not been broad based. Looking ahead, this might change, and the rally could broaden, depending on forward earnings guidance, economic developments, and tariff-related newsflow. Our focus remains on identifying those names through a bottom-up analysis that could withstand these vulnerabilities.


 

Prioritise valuations and quality

stacking coins

Domestic resilience amid global volatility

GIV MAY EM

Domestic resilience amid global volatility

The long-term (but non-linear) shift away from the dollar and robust EM-DM growth differential paint a constructive picture for emerging market assets. However, at the moment, the uncertainty surrounding President Trump’s next policy moves and their impact on trade negotiations and foreign policy is high – whether relating to conflict in the middle east, and trade with countries such as China, India.

In China, recent data has been benign and the country seems to have used its leverage (rare earth exports) in negotiations with the US. But the picture is clouded by weakness in the housing sector and lack of structural reforms. Overall, we are exploring domestic opportunities that are uncorrelated with the global cycle, with a strong selection bias.

Stay risk-on, disciplined through hedges

Macro conditions, liquidity and growth are reasonably supportive of risk assets. Corporate earnings prospects are also decent, but H2 would test whether companies are able to pass on the higher costs to consumers. This, coupled with high valuations in risk assets and geopolitical uncertainties, could lead to some consolidation but not an outright-sustained recapitulation. We maintain our positive view on risk assets, and believe investors should consider reinforcing hedges.

Equities have shown resilience in the face of ambiguous tariff policies and geopolitical tensions. We realise that valuations are becoming expensive, particularly in the US, but there are factors such as earnings growth, decent economic activity that keep us constructive overall including on the US mid caps, Eurozone and the UK. We also see a need for better protections in the US. In EM, our stance is positive through China and particularly on the technology sector.
 

Stay risk-on, disciplined through hedges

GIV May Multi asset

Changes vs previous month

  • Fixed income: We stay constructive on duration overall, but slightly downgraded EU duration to neutral.

  • Multi asset: Reduced our positive stance on credit, and see a stronger need for more protection in equities. In fixed income, we raised our positive view on US duration.

  • FX: Cautious on the dollar, and positive on the euro now.

2025-07-11

Global Investment Views - July 2025

|1.5 MB

The issuer of this document is Amundi Hong Kong Limited. This document is not intended as an offer or solicitation with respect to the purchase or sale of securities, including shares or units of funds. All views expressed and/or reference to companies cannot be construed as a recommendation by Amundi.  Opinions and estimates may be changed without notice.  To the extent permitted by applicable law, rules, codes and guidelines, Amundi and its related entities accept no liability whatsoever whether direct or indirect that may arise from the use of information contained in this document. This document is for distribution solely to persons permitted to receive it and to persons in jurisdictions who may receive it without breaching applicable legal or regulatory requirements. This document and the mentioned website have not been reviewed by the Securities and Futures Commission in Hong Kong (the“SFC”). This document is prepared for information only and does not have any regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Any person considering an investment should seek independent advice on the suitability or otherwise of the particular investment.  Investors should not only base on this document alone to make investment decisions. Investment involves risk. The past performance information of the market, manager and investments and any forecasts on the economy, stock market, bond market or the economic trends of the markets are not indicative of future performance.  Investment returns not denominated in HKD or USD is exposed to exchange rate fluctuations. The value of an investment may go down or up. This document is not intended for citizens or residents of the United States of America or to any «U.S. Person» , as this term is defined in SEC Regulation S under the U.S. Securities Act of 1933.