Global Asset Allocation: The View From Europe

Outlook: New World Order

• We maintain a cautious outlook on risk assets, as the challenges posed by disruptive trade policies weigh on the trajectory of global growth and inflation.
• Negative sentiment around tariffs is weighing on the US growth outlook, whilst fiscal policy impacts remain unclear. Economies outside the US are facing similar growth concerns but with greater flexibility around monetary policy and with some, including Europe and China, acting on fiscal policy as an offset.
• Central banks, including the European Central Bank and the Bank of England, may have to ease policy further to support growth, whilst the Fed may also have to balance rising inflationary pressures as a result of tariffs.
• Key risks to global markets include the impacts of global trade tensions, the threat of higher inflation, central bank missteps and ongoing geopolitical tensions.

Themes Driving Positioning

Tick, tick, tick…

With the exception of a deal with the UK, uncertainty remains on progress with major trade partners, notably China, the European Union (EU), and Japan, as the July deadline from the 90‑day postponement of reciprocal tariffs looms. Further exacerbating market unease has been the courts’ recent rulings on the legality of the tariffs. With less than a month to go before the deadline, and seemingly much work left to be completed in securing deals with a large number of trading partners, markets may have gotten too complacent about the ability to pull off such a large feat. With the rhetoric still heightened, it’s casting more doubt that the July deadline will finally bring resolution to the tariff‑led trade war. So as the clock is ticking closer and closer each day, the lack of progress on deals—or even an extension—is likely to further exacerbate already poor sentiment among businesses and consumers, leaving us cautious on the outlook.

Tipping point?

Despite continued progress on inflation and increasing growth concerns, US longer‑term yields have been on the rise as the focus has turned toward the growing deficit, highlighted by Moody’s recent downgrade. Whilst the administration’s current push for legislation increasing spending and lowering taxes has added fuel to the fire, other factors are contributing. Amongst those are waning foreign demand as sentiment toward the US has turned negative and worries that tariffs could ultimately lead to higher inflation. And whilst the level of rates has yet to severely impact the economy or equity market sentiment, pockets of stress could begin to emerge should rates drift higher from current levels, especially in the housing market and for corporations having to roll debt. Against this backdrop, we remain cautious on equities and longer duration, as we could be closer to a tipping point on rates with no letup in fiscal spending or trade relief in sight.

 

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