Trade war complicating the Fed’s job

Extreme policy uncertainty in the US is leading to sharp movements and increased volatility. Recent bond yield dynamics signal a shift from seeking safety in US assets to a reassessment of Treasuries and the USD as ultimate safe havens. While we think it is too early to question the trust in US assets, we also think any challenge to the Fed’s independence and so much policy uncertainty could undermine investor confidence. For instance, the perceived risks around capital outflows and some repositioning in the markets caused the recent divergence between US yields and dollar. 

Image
Monica Defend

Monica Defend

Head of Amundi Investment Institute

We think the Fed will reduce policy rates three times this year, with risks of more cuts if unemployment weakens. Furthermore, pressures on US growth imply repercussions for Europe, but the impact on stock prices would depend on how expensive the valuation multiples are to begin with.

Monica Defend, Head of Amundi Investment Institute

Tilt to Europe duration

investment

Tilt to Europe duration

We are witnessing higher term premium in the US along with higher inflation expectations owing to uncertainty around import tariffs. While the Fed will be forced to deal with these inflationary pressures in the near term, inflation is less of a concern for the ECB. This could create some policy divergences between the two global central banks, leading us to downgrade our terminal rate expectations for the ECB.

In particular, lower energy prices, the muted EU response to tariffs so far and moderate wage growth in Europe all point to limited inflation risks. In addition, any deceleration in economic growth could affect corporate fundamentals, particularly in US. Hence, we maintain a global and a selective approach to credit and duration, and keep our bias towards quality.
 

 

Rotation opportunities amid a sell-off

The rotation that started at the end of last year is still continuing and has been fastened by the trade war. As a result, US equities have been the most affected, leading to a derating in valuation multiples. Despite that, valuations remain expensive and other regions are relatively more appealing. In Europe, the key factor to monitor is the extent to which fiscal stimulus and infrastructure spending could offset the impact from tariffs.

The sustainability of this rotation depends on earnings and how confident companies are with respect to the impact from tariffs. While we expect guidance to be bleak, we think there are opportunities to be found in businesses with strong fundamentals and with a strong domestic focus in Europe, UK and Japan.
 

Rotation opportunities amid a sell-off

stacking coins

EM Divergences in the tariff disruption

GIV MAY EM

EM Divergences in the tariff disruption

While emerging markets are sensitive to developments in global trade, policies of the US administration and geopolitical developments, some regions/countries seem to be more affected by US tariffs than others. At the same time, resilient domestic economic growth and less correlated economic cycle (from international trade) in select regions mean there are ample opportunities to diversify and generate income over the long term.

For instance, US tariffs are more likely to affect some supply chains in Asia, whereas Latin America could be the least hit. The important questions for us are where US tariffs will finally land, what will be the retaliation and who will be the likely winner of this US attempt to decouple from China. Another important point is which countries will be able to negotiate bilateral agreements. While the answer is complicated, we are careful to not take extreme views as the situation is fluid. 

US exceptionalism at risk: stay flexible

‘Liberation Day’ marked a massive US policy shift towards a more chaotic, transactional approach. US growth slowdown would depend on the duration of these tariffs and retaliation from trading partners. The damage to investor and consumer confidence has started already and markets are challenging US exceptionalism. But macro, credit and liquidity conditions are reasonable. In this environment, we explore all levers available, including EM bonds, and believe the supremacy of the dollar in FX is at risk. At the same time, we think investors should keep portfolio safeguards, such as gold, intact.

US exceptionalism at risk: stay flexible

GIV May Multi asset

Changes vs previous month

  • Multi asset: now positive on emerging market bonds, slightly less constructive on developed and emerging market stocks.

  • Emerging markets: more constructive on equities in Latin America and emerging EMEA but less so on EM Asia. In bonds, slightly more optimistic on local currency.

  • Cautious on USD

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.