Politics is the central theme of this period, both in the United States and in Europe.
In France, the current scenario strongly reminds us of the situation at the end of 2024, marked by the fall of the Barnier government. The result should be similar with a new government that will likely opt for a less ambitious economic policy than expected, and thus a country that will continue to face high deficits, low growth and political instability. It is difficult to be very positive in this environment, even though current expectations already seem to reflect a possible deterioration in the sovereign rating. We were cautious on French assets in the past months, and we maintain this positioning but without referring to a disaster scenario. A resignation of Emmanuel Macron or a new dissolution seem unlikely to us at this stage.
In the United States, politics are also the main theme, between tariff wars, appointment of the Fed or attempts to negotiate a peace agreement with Russia. It is difficult to have a lot of certainty, but in the end, we think there are too many similarities with the situation in the fall of 2024. Last September, we thought that expectations for Fed rate cuts seemed overstated to us, given the healthy state of the US economy, despite the risks in the labor market. This is still the case this year: fairly reassuring figures on activity, a consumption that continues and should stay on the same level and, in addition, a significant inflationary risk. The leading indicators are converging towards higher prices, exacerbated by tariffs, the cost of which will be largely paid by the final consumer.
The Eurozone is showing a gradual improvement, with growth revised upwards and an exit from the manufacturing recession. Germany, the region's economic engine, is benefiting from massive stimulus plans that should sustain the momentum in the coming quarters. The fall in energy prices (oil and gas) is another positive factor for both activity and the control of inflation. In this context the ECB is likely to maintain a wait and see stance. Finally, any diplomatic progress between Russia and Ukraine, such as a ceasefire, would be an additional catalyst for regional stability.
In a world still dominated by large budget deficits in major developed economies, we believe the overall environment remains supportive of risk assets in the medium term, despite historically unattractive valuations in some market segments. This macroeconomic framework is also a driver for the continued steepening of the yield curves, while the dollar is likely to remain under pressure.
In the United States, the sharp downward revision of job creation figures for recent months has led to accelerated expectations of Fed rate cuts to limit the deterioration of the job market. Nevertheless, despite benign inflation figures for July, the recent rise in producer prices underlines the upward risks hanging over US inflation due to the trade war. The 2 year and 10 year government bond yields (3.63% and 4.22% respectively) are likely to move around current levels. […]
Download full pdf :