Global Asset Allocation: The View From Europe

Outlook

• We maintain a balanced view on risk assets, factoring in still supportive fiscal and monetary policies and earnings growth, offset by ongoing trade tensions and moderating economic growth.
• Whilst still expected to moderate and facing potential tariff-related inflation pressures, US economic growth is supported by an uptick in fiscal spending.
• Outside the US, many economies’ growth outlooks are at risk due to the impacts of trade policy, though increased fiscal spending—particularly in Europe—is providing support.
• Key risks to global markets include the impacts of global trade tensions, the threat of higher inflation, central bank missteps, a weakening labour market and ongoing geopolitical uncertainties.

Themes Driving Positioning

Pressure’s on

Another tariff deadline passed on 1 August, followed by a one-week extension, intensifying pressure on those countries still working to secure a deal and avoid higher tariff rates. Although there was initial uncertainty after Liberation Day regarding the likelihood of multiple deals, it has become evident that the second Trump administration is determined to deliver—negotiating bilateral ‘fair’ agreements with more favourable terms and concessions than many expected. Europe serves as a prime example, having agreed to a 15% tariff along with a commitment to buy USD 750 billion in US energy and invest USD 600 billion more in the US economy. Similar concessions came from Japan and South Korea as they weighed the consequences of further escalation. With most of the US’s major trading partners having reached deals, the focus now shifts to a potential agreement with China, one of the final and most significant challenges. Whilst markets have reacted positively to progress on these deals, the long-term effects remain uncertain.

Health check

The latest labour market data revealed some worrisome signs, with July’s nonfarm payrolls falling well below estimates at only 73,000 new jobs added and significant downward revisions for May and June of 258,000 fewer jobs. Similarly concerning was that the areas of job gains were primarily within noncyclical sectors—education and health care. The labour market has been surprisingly resilient since recovering from the coronavirus pandemic, and a key reason the Fed has been cautious to reduce rates. The recent weakness echoes patterns observed last summer when markets were surprised by sudden job market deterioration, raising concerns that the Fed was behind the curve, before they followed through with their first rate cut. Today, with the Fed hyper-focused on prospects for higher inflation related to tariffs, let’s hope they don’t miss early signs that the job market may be less healthy than it appears.

 

For a region-by-region overview, see the full report (PDF).