GLOBAL STOCK MARKETS

The year 2025 was marked by significant turbulence, characterized by high levels of political and geopolitical uncertainty. It underscored once again the dependence on the US, which accounts for roughly two-thirds of global market capitalization.

Despite these challenges, global equities delivered robust returns, driven by both large-cap leaders and smaller companies. AI-focused firms significantly contributed to this performance, while non-US sectors such as defense, Asian technology, and commodities outperformed the US market. The dominance of artificial intelligence has sparked discussions about a potential investment bubble, raising questions about how the capital expenditure boom is being financed.

Temporary corrections are to be expected, as the S&P 500 recorded its third consecutive year of strong gains. This risk is inherent in every investment and can be managed through an appropriate long-term investment strategy, good
diversification, and adequate risk management. The long-term opportunities outweigh the risks, and even after an excellent year, where risk-on sentiment drove an “everything-rally,” investors should not remain on the sidelines. The investment cycle in the AI sector is likely not yet over, and the US consumer remains robust. Exciting opportunities could also arise in China and Europe if government stimulus measures find their way into the real economy. Given the current investment environment, real assets are likely to remain among the most sought-after asset classes in 2026.

Our strategies for the start of the year continue to focus on equities. Bonds are less attractive given the interest rate environment but should still offer tactical opportunities. Precious metals remain an important addition to a portfolio. Markets are shifting focus from exciting narratives to tangible financial performance results. It requires the balance of longterm growth themes with protection against volatility.

 Fundamentals and discipline will become important again. The last year brought a meaningful change. The world faces a prolonged shift toward protectionism and regionalization, along with increased defense and infrastructure spending. This shift may uncover value in sectors beyond traditional tech giants. Looking into 2026, we see several supportive elements for an acceleration of global economic growth.

The US will start to benefit from the OBBBA tax cuts and capital investments. We can expect the current US administration to seek ways to support consumers ahead of the November midterm elections. Similarly, the European and Japanese economies will be supported, while China’s new 15th Five-Year Plan (2026-2030) will be in focus too. In conclusion, the investment landscape in 2026 presents both challenges and opportunities.

GLOBAL FIXED INCOME MARKETS

Major central banks shifted into easing monetary policy. The FED initiated rate cuts in September, ending the year with three reductions as labor markets softened. Bringing the target range to 3.75% and 3.50%. By June, the ECB lowered the deposit rate from 3% to 2%. On the opposite side, the Bank of Japan had to increase its target rate from 0.25% to 0.75%, as inflation is uncomfortably high.

The US 10- year Treasury yield ended 2025 at 4.16%, down from 4.56% at the start of the year. A “risk-on” sentiment prevailed across asset classes, resulting in an “everything rally” where all major asset classes delivered positive returns for the first time since the pandemic. The Bloomberg US Aggregate Bond Index rose by 7.3% return. US fixed income outperformed most developed markets. The German 10-year Bund yield rose from 2.36% to 2.85%. The Japanese 10-year JGB from 1.10%to 2.06%.

Fiscal concerns continued to weigh on government bonds, particularly in Europe and Japan. Global credit markets have been running hot. Yield premiums on corporate debt have narrowed to the lowest since 2007. Investment grade and high yield corporate bonds saw strong demand due to good corporate fundamentals and attractive all-in yields.

Mortgage-backed securities outperformed corporate bonds. The feared tariff-driven inflation spike failed to materialise, instead the weakening of the labour market paved the way for the FED to lower rates. For 2026 we only see the need for one 25bps cut as the economy accelerates on fiscal stimulus. One source of uncertainty for investors come from the wide range of forecasts in the FED’s dot plot, reflecting unusually divisive members, with opposing economic and political views.

The spread between the low and high estimate for 2026 has widened to 175bps. Incoming economic data will be scrutinized. The announcement of the new FED Chairman, and his intentions, will be critical too. The FED is challenged by the decoupling of US GDP growth from evidently sluggish jobs creation. The third quarter GDP accelerated to an annualized 4.3% pace, while Nonfarm payrolls have flatlined. The FED needs to adapt to the economic transformation. Its data-dependent approach is no longer up-to-date.

US DOLLAR

After the Dollar had fallen 10% from its peak last February, it drifted higher for the second half of the year. Calls for de-dollarization in the face of escalating tariff wars were increasing. Many saw the end of the US Dollar as a reserve currency and safe haven. Yet, capital inflows into US asset remained. Despite the many unknowns hanging over the financial markets, geopolitics, FED independence, political risks and the present threats of an intervention, volatility in FX markets has stayed very low.

Although the Dollar’s share of global foreign exchange reserves has declined from over 65% to 58% over the past 10 years, there is no getting around the US capital market and the dominant role of the Dollar in the global reserve system in the foreseeable future.
However, it’s clear that a shift towards a more multipolar global monetary system is underway, with the US and China utilizing different strategies to gain influence. The US is embracing financial technology. The US regulatory approach is leaning on the development of Dollar-pegged stablecoins. China is working to internationalize the Yuan and gradually reduce reliance on the Dollar by using a dual strategy of accumulating Gold and promoting its own digital currency, e-CNY. The year 2026 is shaping up to be a very interesting one for the FXmarkets.

COMMODITIES

The Bloomberg Commodity Index was up 11% in 2025.
The Precious Metals Index increased by 73%, with Silver rising an astounding 147%. Elevated levels of risk, such as fiscal deficits, trade tariffs and geopolitical concerns, continue to see investors favor the safe haven of precious metals.
Silver’s surge was intensified when the US designated it as a critical mineral and China imposed stricter export controls, heightening fears of supply chain disruptions and prompting physical stockpiling. The Bloomberg Energy Index fell 14% in 2025. OPEC+ has shifted toward a cautious «wait-and-see» strategy, deciding to pause all planned production increases through March. In 2025, OPEC+ increased its total oil output targets by approximately 2.9 million bpd.

The US intervention in Venezuela has only a limited bearish impact on oil, however, the geopolitical signal is significant. The market structure has since moved to a steeper backwardation, implying tightness of supply. At the same time, a large speculative positioning in WTI Crude futures indicates a bearish positioning, that could be vulnerable to reversal, increasing upside asymmetry. We keep the recommended tactical allocation in commodities at neutral. We remain strategically positive on precious metals. Further, it’s still worth to bear in mind, that commodities as a group remain a vastly under-owned cohort.

MACRO

US headline inflation was reported at 2.7% for December, down from 3% in September. The FED’s preferred inflation gauge, PCE, has not been reported since the September data, due to the US government shutdown. The US disinflation trend has not reversed, however, the progress has stalled. This proves the stickiness of inflation above 2% target. We have pointed out before, that a post-peak globalization world will exhibit stagflationary tendencies. That growth will be lower than inflation. Looking ahead, measures of global liquidity show, that the US funding cycle has peaked, what has led the FED to end its quantitative tightening. 

At the December meeting the FED announced its Reserve Management Purchases program of monthly purchases of short-term Treasuries of around $40 billion, to maintain an ample level of reserves in the banking systems. On the other hand, measures show, that China embarked on a new liquidity cycle. While the US liquidity cycle is more beneficial to the financial markets, China has more impact on the real economies, due to its large industrial footprint. As the global economy is to improve, business activity will redirect liquidity away from financial markets.

Looking at 2026 requires to understand, that the geopolitical change impacts trade, security and energy. A new technological race has started. So-called geopolitical camp formations are reshaping how the world works. As a consequence, a redesign of supply chains asks for significant capital expenditures in energy, grid infrastructure, AI and defense, what will create winners and loosers. Today investors are surounded by an enormous amount of uncertainty. The financial markets had, and have to weather and tolerate all kinds of unconventional policies in the past year.

Policy is increasingly determining market behaviour, with decisions on spending, taxes and trade having an impact on various areas of the financial markets.
Policy risk has become central to investment management. The interconnected challenges of rate transitions, fiscal pressures, and regulation are shaping portfolios in real time. A fundamental reorganization of the global economy along with its supply chains, energy systems and underlying technology foundations is taking place.

TACTICAL ALLOCATION

The inflationary forces are structural and secular, on higher debt-load, demographics and on-shoring of manufacturing. We have been in an interim period for the past three years, however: the disinflation progress has stalled. Inflation risks have not gone away. The market currently prices in 50 bps cuts for 2026 in the US, and sees the ECB at the terminal rate.
We recommend to cut the allocation in fixed income tactically to underweight. We only see the need for one 25 bps cut, as fiscal stimulus will be supportive, and more measures can be expected ahead of the US mid-term elections. Fiscal worries around Europe and Japan will persist, what will continue to drive term premia higher. Less so in the US. We prefer investment grade. We maintain high yield to neutral, however, we see a poor risk/reward in credit spreads. Private credit concerns remain, but the near-term outlook seem not to deteriorate sharply. Overall, selectivity and diversification are key. We are mindful of the developments in the commodities, particularly in energy for signs, should inflation risks accentuate.

S&P500 & VOLATILITY

The upswing in the investment cycle is now 39 months old, if one counts from the low in October 2022, when the current liquidity cycle started. Based on market activity in early 2026, a significant “Great Rotation” is underway, moving capital out of US megacap tech stocks into smaller-cap, value-oriented and international equities. The rotation should be also reinforced by economic drivers. Asia sees burgeoning confidence across the region. The focus turns to global “shovel” assets, energy, grid, automation and AI compute. Markets are still in a positive but delicate equilibrium, they can continue to go higher, but have become more sensitive to a broad range of macro and political factors. Equity valuations are not cheap, with the forward 12-month P/E ratio for the S&P500 at 23, compared to the 5-year average of 20. We maintain the allocation in equities to neutral, but remain vigilant. We are neutral on US and Europe and overweight to China. By focusing on fundamentals and maintaining discipline, investors can navigate the complexities of the market and capitalize on the opportunities that arise.

GLOBAL STOCK MARKETS

In the third quarter macroeconomic developments were back in focus, after US labor market data has weakened considerably. The 5-month average Nonfarm Payrolls dropped to 53k created jobs in August, down from 197k in January. In addition, the preliminary benchmark revisions showed 911k less jobs created than previously reported for the 12 months ending in March 2025. The third estimate of GDP for Q2 was significantly revised up to 3.8% from3.3%, primarily reflecting a decrease in imports and an increase in consumer spending. Core PCE inflation for 2024 was revised higher. 4Q24 was running at 3% vs 2.8% previously reported. With effect from October 1, the Trump administration announced the largest wave of tariff announcements in months, such as 100% tariff on pharmaceuticals.

On the same day, the US government shut down for the first time in nearly seven years, halting operations across multiple departments and agencies, as Republicans and Democrats failed to break a deadlock over Obamacare health funding. Global stocks continued to rise, led by US and Chinese stocks, whereas European markets stagnated. The mania for AI related stocks remained the main driver of the markets advance, with new tech leaders emerging outside the Magnificent 7. The US stock market has risen 40% since the April 7 low, following President Trump’s tariff announcements shock, brushing aside worries about high stock prices, unclear government policies, and the effects of tariffs. Nvidia reached a milestone in July, becoming the first company to surpass a market capitalization of $4 trillion.

With the S&P500 at a new record high, the valuation has become more expensive, trading at a forward P/E of 23x, with slowing growth expectations. While valuations have historically been a poor market-timing tool, but it can be seen as a sign of building euphoria, compounding worries around the concentration of big tech names. On the other hand, Chinese stocks are still attractively valued, yet, have been the outstanding performer this year. Many believed, that China would be the main loser in the trade war, however, the Trump administration has been rather cautious in dealing with China, as it’s in an advantageous position because of considerable control over rare earths.

Still dealing with the aftermath of the real estate crisis, Chinese authorities have strongly supported the buildup of a competitive domestic technology sector. It has become clear, that Chinese tech companies are gaining strength in the AI space. Overall, the picture in 2025 has been marked by labor market cracks, fiscal deterioration and tariff shocks. Equity markets have stayed buoyant due to AI-driven tech, but structural risks, inflation, deficits, FED independence and geopolitical frictions remain elevated. We believe equity markets are in a positive but delicate equilibrium, they can continue to go higher, but are increasingly sensitive to a broad range of macro and political factors.

GLOBAL FIXED INCOME MARKETS

Global bond yields behaved mixed in Q3. Long-term bond yields rose in Europe and Japan, while the benchmark US 10yr yield fell 8bps to 4.15%. Interestingly, the term premia, a measure that refers to the extra yield investors demand for holding longer-term bonds, continue to remain elevated, reflecting a backdrop of rising issuance and uncertainties. Overseas investors returned to purchase US Treasuries. Concerns that underlying geopolitical tensions would cause foreigners to stop purchasing, or even sell, US government debt have yet to materialize.

The Bloomberg Global Aggregate Bond Index was +0.6% in Q3, US Treasuries +1.5%, whereas European Government Bonds fell -0.2%, on political uncertainties and fiscal worries. French 10yr yield surpassed those of Italy, as France faced a fresh political crisis. UK’s 10yr yield trade way above, as the budget debate is under way.

Speculation arose, whether the IMF will step in, as it happened in the UK in 1976. In light of the weak jobs market, the FED expectedly lowered key rates by 25bps, yet warning inflation remains somewhat elevated. The FED expects inflation ending this year at 3% and economic growth to be at 1.6%. The ECB kept interest rates unchanged, while projecting inflation to be 2.1% and growth at 1.2%. The FED, as always, was particularly in focus. At the Jackson Hole Symposium in August FED Chair Powell pointedly kept the door open to a near-term rate cut, what markets read as a dovish pivot. Powell emphasized softer labor-market conditions and a shift in the balance of risks.

President Trump has repeatedly publicly called on the FED to cut rates faster and more aggressively than the FED’s prevailing view. Trump tried to fire FED Governor Lisa Cook, what triggered legal challenges and court interventions, raising questions about the FED’s independence. Just ahead of the September FED meeting, White House economic adviser, Stephen Miran, was confirmed to the FED board. His dual role and past alignment with Trump reinforced concerns about political influence. Despite the pressure from the White House for larger cuts, the FED decided in an 11-1 decision to reduce only by 25bps. That no other governor dissented was a significant message. Another surprise came from the wide dispersion in the ‘Dot Plot’, the governors individual rate projections, showing how divided the FED is on how fast to cut rates. With a spread of 125bps between the low and high estimate for 2026, incoming economic data will be scrutinized.

US DOLLAR

The Dollar has fallen 10% from its peak in early February. Calls for de-dollarization in the face of escalating tariff wars were increasing. Many saw the end of the US Dollar as a reserve currency and safe haven. However, one cannot exclude the possibility that the US Administration wants to weaponize the US Dollar and so make it weaker to improve industrial competitiveness. Yet, capital inflows into US asset remain. Although the Dollar’s share of global foreign exchange reserves has declined from over 65% to 58% over the past 10 years, there is no getting around the US capital market and the dominant role of the Dollar in the global reserve system in the foreseeable future. 

The launch and growth of stablecoins generally increase demand for US Dollars. Over 90% of the stablecoin market is backed 1:1 by US Dollar assets, such as Treasury bills. We reiterate our assessment from late June that the Dollar correction has likely reached its limits. It should be recalled, that significant macro trading opportunities are emerging in the FX markets due to the current upheavals in global trade, geopolitical uncertainties, and diverging approaches to public finances.

COMMODITIES

The Bloomberg Commodity Index was up 3.65% in Q3, +9.38% since the start of the year. The Precious Metals Index was up 19% and an astounding 48% since the start of the year.

Elevated levels of risk, such as fiscal deficits, trade tariffs and geopolitical concerns, continue to see investors favor the safe haven of precious metals. Gold reached its next milestone at $4’000 per ounce. The Bloomberg Energy Index was down 3.33% over the quarter, -4.45% since the start of the year. After higher-than-expected increase in oil output starting in August, OPEC+ decided for a modest November hike of 137k bpd.

The group’s restraint likely highlights growing unease about softening balances and limited demand support for 2026. We keep the recommended tactical allocation in commodities at neutral. We remain strategically positive on precious metals. Further, it’s still worth to bear in mind, that commodities as a group make up only somewhere between 1-3% of total global assets under management. Commodities remain a vastly under-owned cohort.

MACRO

Market based inflation expectations, which are important to monitor, continue to stay closer to 2%. US headline inflation moved up to 2.9% y/y in August, after having fallen to as low as 2.3% in April. We were expecting tariffs to start to show up more visibly in the data, as the setup of tariffs, firm inventories, and CPI methodology all lead to a delayed pass-through into the official consumer price measure.

The FED’s preferred inflation gauge, PCE, was reported 2.9% y/y for August. This proves the stickiness of inflation above 2% target. We have pointed out before, that a post-peak globalization world will exhibit stagflationary tendencies. That growth will be lower than inflation. Investors face challenges in understanding the current US administration’s policies and philosophies. This is due to a lack of predictability and a unique approach that combines domestic and international issues. The key aspects to consider are, the administration takes a holistic view, connecting various matters into a single policy agenda.

It demonstrates flexibility in tactics while maintaining a focus on strategic goals. The administration is unbound by conventional wisdom, focusing on power sources and untapped opportunities. Trade policy exemplifies this. Traditional theory supports free trade for global efficiency and growth. The current administration’s approach considers improved trade terms, economic security, and addressing inequality. This suggests a broader policy perspective that goes beyond just tariffs and includes economics, foreign policy, politics, and culture.

A more comprehensive view is needed to evaluate the long-term impact on global economic activity and prices. A fundamental reorganization of the global economy along with its supply chains, energy systems and underlying technology foundations is taking place. 

There is a strong connection between global liquidity and risky assets. Global liquidity is largely controlled by China on the one side and the FED, and increasingly the US Treasury, on the other. While the FED influences financial markets, the PBoC drives real economy and commodity cycles. Investors must therefore also closely watch China and its monetary policy actions. 

Chinese liquidity is on the up. However, a resurging Dollar tempers global liquidity. We live in a debt-dominated world. Today financial markets serve as debt refinancing mechanism, more so than as a capital raising vehicles for new investments.

According to the World Bank 80% of credits are collateralbacked, at the heart of it are the repo markets, fundamental to the functioning of collateralized credit. The market structure has shifted, the interbank FED-funds market, which is unsecured, is now much smaller in importance than secured funding markets. It is no surprise, that in a recent paper the FED Dallas discussed considering the repo markets as a new operating target. Recent data show emerging imbalances between the supply of liquidity and the availability of good quality collateral.

TACTICAL ALLOCATION

The inflationary forces are structural and secular, on higher debt-load, demographics and on-shoring of manufacturing. We have been in an interim period for the past three years. Inflation risks have picked up at end of 2024. The market currently prices in 50 bps cuts for the remainder of 2025, and sees the ECB at the terminal rate. We recommend to increase the allocation in fixed income tactically to overweight, on US rate cuts prospect, driven by growth and labor market concerns. We prefer investment grade. We maintain high yield to neutral, however, we see a poor risk/reward in credit spreads and expect a slight widening. Selectivity and diversification are key. We are mindful of the developments in the commodities, for signs, should inflation risks accentuate.

S&P500 & Volatility

The upswing in the investment cycle maybe 36 months old, if one counts from the low in October 2022, when the current liquidity cycle got started. But the investment climate is still mostly risk on. We believe equity markets are in a positive but delicate equilibrium, they can continue to go higher, but are increasingly sensitive to a broad range of macro and political factors. Asset allocation today is primarily driven by global liquidity. What is increasingly the result of government spending, respectively what can be termed fiscal dominance. Equity valuations are not cheap, with the forward 12-month P/E ratio for the S&P500 at 23, compared to the 5-year average of 20. However, rising AI capital expenditure will be supportive to valuations. Although current investor sentiment is neutral, US household allocation to stocks hit a record 45%. We maintain the allocation in equities to neutral, but remain vigilant. Things can change day-to-day. We are neutral on US and Europe and overweight to China. We focus on high quality and diversification remains key.

GLOBAL STOCK MARKETS

Despite initial hopes that the turbulence of Trump 2.0’s early days would subside, it seems the presidency is continuing its volatile course. With ongoing trade negotiations, FED clashes over interest rates, and significant geopolitical manoeuvres, investors must keep their composure amidst the uncertainty. Q2 continued serving up surprises, making the global investment scene a wild card in April. Trump’s ‘Liberation Day’ tariff policies rocked the markets, spiking volatility measures. On April 9th, markets breathed a sigh of relief as Trump paused tariffs (except for China) for 90 days.

In June, the Israel-Iran conflict took centre stage, driving WTI crude oil prices from $60 to $78, yet market reaction was oddly tame, with volatility metrics only showing minor increases.Jump to July, and tariffs grab headlines again. Five months into Trump 2.0, we see the pace isn’t slowing. The President can change his stance on a dime, leaving investors reeling and strategizing. Critics call it pressure, supporters call it negotiation tactics. Whatever your view, investors must roll with the punches, keeping an eye on underlying macro and microeconomics, while tuning out the policy noise.

As we are at mid-2025, equity and credit markets have bounced back, but geopolitical turbulence and policy volatility continue to shake up the economy. Our global economic outlook remains cautiously optimistic. Tariff uncertainty has split the macro picture, where soft data hints at a downturn, while hard data shows resilience. Households and corporations remain strong, and pauses in tariffs suggested possible negotiations. Markets recovering should boost high-income consumer spending. Geopolitical tensions pose risks, but the U.S. is more resilient to energy shocks than in the ’70s. We expect slower, positive growth in H2, but risks persist. Surprisingly, US policy might reinvigorate Europe, with Germany’s stimulus potentially doubling growth in 2026-27. China’s outlook is shaky, but pulled-back tariffs in May suggest possible stability. We expect China’s policymakers to provide enough fiscal support to hit their growth target for 2025. Some question US exceptionalism, but America’s advantages—strong demographics, cutting-edge tech, and robust new businesses—should maintain its edge.

We expected, that 2025 will bring a more balanced development, as valuations and investor sentiment differentials between the US and the rest of the world seemed extreme. We had witnessed a significant rebalancing from US equity markets to Europe and China over the past couple of months. However, following the April lows, US equities have recouped their underperformance. Markets configuration has become stretched again, yet the liquidity backdrop has improved. Deglobalization is not just about trade, people, data, it’s about capital too. In a world of economic nationalism, capital is at risk to deglobalize too. Potentially, one of the big stories of the next few years.

GLOBAL FIXED INCOME MARKETS

The macro scene has stabilized as fears of a US and EU recession gave way to optimism about potential trade deals. Central banks are nearing the end of their rate-cutting cycles, shifting focus to fiscal policy and debt sustainability. Despite uncertainty, credit markets remained resilient, posting positive returns across sectors and geographies. The Reconciliation Bill in the US intensified debt dynamics concerns. Treasury market experienced a sell-off into May, the US 10yr yield moved above 4.6%. High-deficit countries felt the sell-off.

Foreign investors’ concerns over the ballooning US deficit and a weakening US Dollar led to selling pressure on US Treasuries.What proved to be only short-lived fears. Major central banks maintained or marginally eased policy rates, with the ECB cutting twice to 2%. The FED held rates steady at its two meetings.

At the June 17-18 meeting it reiterated its wait-and-see mode. In their updated economic forecasts, the FED raised the inflation expectation to 3% from 2.7% at the end of 2025 and marked down their forecast for economic growth to 1.4% from 1.7%, still highlighting the risk of a stagflationary environment. While inflation remains sticky, we expect growth to slow over the coming quarters, paving the way for the FED to deliver two cuts by the end of the year. Yield curves steepened, except in Japan and Canada. President Trump’s ongoing criticism of the Federal Reserve’s reluctance to cut interest rates added to uncertainty. Nonetheless, the FED remains data-dependent, assessing the economic and inflationary impact of Trump’s fiscal policies and import tariffs. Balanced portfolios benefited from bonds’ cushioning effect, as high-yield, corporate, and treasury bonds all provided support and posted positive YTD returns. Interest rates stayed higher than anticipated.

Renewed attention to America’s $36 trillion national debt put the spotlight on government spending in Washington. Recent budget proposals may add $3.3 trillion in deficits over 10 years. Moody’s US credit rating downgrade reflects ongoing concerns about unchecked deficits and rising interest costs, echoing previous fiscal standoffs in 2011, 2013, and 2018-2019. The market has historically bounced back once agreements are reached, underlining the resilience of the US economy. Interestingly, the term premia, a measure that refers to the extra yield investors demand for holding longer-term bonds, continue to remain elevated, reflecting a backdrop of rising issuance and uncertainty.

US DOLLAR

The Dollar has weakened more than 10% this year on concerns about the US economy, including growing warnings over the country’s debt pile. Reports President Trump could pick next FED chair early might have added. In recent years the Dollar has been supported by high US growth compared to the rest of the world,attractive FX carry and strong relative performance of US equities. Calls for de-dollarization in the face of escalating tariff wars are increasing. Although the Dollar’s share of global foreign exchange reserves has declined from over 65% to 59% over the past 10 years, there is no getting around the US capital market and the dominant role of the Dollar in the global reserve system in the foreseeable future.

In our view, the correction of the Dollar since February is close to being exhausted, as the bearishness has reached extreme. With the seismic shift in global trade underway, geopolitical uncertainties and the different approaches to public finances, great macro trade opportunities are coming up in forex markets.

COMMODITIES

The Bloomberg Commodity Index declined in the quarter. The energy component was weak. The agriculture component was also down, although cocoa surged higher.

Livestock, industrial metals and precious metals advanced. Elevated levels of risk, such as trade tariffs and geopolitical concerns, continue to see investors favour the safe haven of precious metals. Escalating conflict risk in the Middle East caused a brief oil price surge amid worries about disruption to shipping, but oversupply of oil kept prices contained. OPEC+ announced a higher-than-expected increase in oil production for August of 548k bpd, after it had announced to gradually increase production by 411k bpd for May, June and July. Despite the geopolitical risks, the Israel-Iran truce has lowered the geopolitical premium and a higher-than-expected output hike from OPEC+ is threatening to push the oil market into a sizable surplus by year-end.

We keep the recommended tactical allocation in commodities at neutral. We remain strategically positive on precious metals. Further, it’s worth to bear in mind, that commodities as a group comprise less than 2% of total global assets under management. It’s a vastly under-owned cohort.

MACRO

Market based inflation expectations, which are important to monitor, have stayed closer to 2% for most part since the beginning of 2021. The disinflationary forces have been playing out and inflation data have slowed significantly from their 2022 peaks. US headline inflation fell to as low as 2.3% y/y in April.

However, tariffs should start to show up more visibly in the data in the coming months. The setup of tariffs, firm inventories, and CPI methodology all lead to a delayed pass-through into the official consumer price measure. The FED’s preferred inflation gauge, PCE, was reported 2.7% for May. This proves the stickiness of inflation above the 2% target. We have pointed out in previous reports that a post-peak globalization world will exhibit stagflationary tendencies. That growth will be lower than inflation.In the latest tariff developments, following the 90 day pause, it appears tariffs are going up, not down. The US Administration has sent letters to 24 countries and the EU with new tariffs to kick in August 1. For Brazil, 50%, and the EU, 30%, the rates are notably higher. 

This comes on the back of an already slowing US economy, while the scale of tariffs has taken markets again by surprise. Stagflation risks are rising, as the tariffs will lower US growth and raise prices substantially. There is the risk, the market is underestimating the negative economic impact from tariffs.

On the other hand, investors must closely watch China and its monetary policy actions. Chinese liquidity is on the up, helped by the weak US Dollar and underpinned by a need to support the stuttering real economy. 

While the FED influences financial markets, the PBoC drives real economy and commodity cycles. We live in a debt-dominated world. Today, financial markets serve as debt refinancing mechanism, more so than as a capital raising vehicles for new investments.

US government debt has risen nine times since 2000, gold has risen by the same pace. However, the debt problem is not unique to the US. Volatility can interrupt the delicate debt-refinancing process that dominates the financial markets. 

In 2025 the first of the maturity walls will be faced, when a significant volume of debt is scheduled to mature, necessitating refinancing or repayment by the issuers. A large part pertains to 5 year bonds issued in 2020 during the pandemic, which were secured at low-interest rates. In addition to that, the US Treasury needs to refinance 25% of the outstanding debt, approximately 9tn. From that perspective, one might be intrigued to guess, that the Trump administration could welcome an economic slowdown, to bring down interest rates. At any rate, the tariff wars show, it is important to understand, that a fundamental reorganization of the global economy along with its supply chains, energy systems and underlying technology foundations is taking place.

TACTICAL ALLOCATION

The inflationary forces are structural and secular, on higher debt-load, demographics and on-shoring of manufacturing. We have been in an interim period for the past two and half years. Inflation risks have picked up by the end of 2024. The market currently prices in 50 bp cut by the FED for 2025, and sees the ECB at the terminal rate. Analysts on average expect the US 10year yield to close 2025 at 4.29%, up from 4.16% at the end of 2024. We recommend a neutral allocation in fixed income. We prefer investment grade. We upgrade high yield to neutral, as recession fears recede. Although credit spreads have tightened a lot, probably too much. However, current market conditions are favorable, with yields around 6%, compared to 4% three years ago. Selectivity and diversification are key. We are mindful of the developments in the commodities, for signs, should inflation risks accentuate.

S&P500 & Volatility

The upswing in the investment cycle maybe 34 months old, if one counts from the low in October 2022, when the current liquidity cycle got started. But the investment climate is still risk on. Asset allocation today is primarily driven by global liquidity. What is increasingly the result of government spending, respectively what can be termed fiscal dominance. It can be expected that China and other economies will likely fight the recessionary forces. The FED so far seems reluctant to re-engage in stimulus, via a larger balance sheet and QE. However, monetary inflation will probably force the FED to step in. Equity valuations are not cheap, with the forward 12-month P/E ratio for the S&P500 at 22.3, compared to the 5-year average of 19.9. However, investor positioning is still rather cautious. We upgrade the allocation in equities to neutral, but remain vigilant. Things can change day-to-day. We are neutral on US, Europe and China, while maintaining the underweight on Japan. We focus on high quality and diversification remains key.

GLOBAL STOCK MARKETS

The most talked-about issue in global financial markets and economics were the Trump administration’s tariff announcements. With the administration arguing that tariffs are a tool to make America a manufacturing superpower again. While most economists disagreed and argued, that tariffs were bad for consumers and ultimately the global economy. Tariffs are an old concept, used as taxes on foreign goods and services, to shield domestic producers from competition from foreigners. Tariffs increase the costs for consumers. The downside in a globalized world is, there is no company producing goods with inputs that are only of domestic origin. Countries respond to Trump’s tariffs by implementing their own tariffs. What in turn threatens American exporters.

The FED thinks, that tariffs might increase inflation in the near term, it sees it as transitory. There will be a period of high inflation and lower growth. Yet, without monetary expansion, economic actors face budget constraints. The inflicted economic slowdown, that the tariffs create, will lead to more federal debt and money printing. Important will be, for how long the new tariffs will stay, or if they are just meant as a negotiating tool for Trump. It’s clear, tariffs increase economic unpredictability and create financial uncertainty. There will be a rise in overall market volatility. The first quarter was a rollercoaster ride.

The start into the new year was bumpy, before the three major US indices reached new all-time highs in February. Macroeconomic concerns started to become more prominent, with inflation figures and weak consumer confidence hurting domestic sentiment. The technology breakthrough made by Chinese AI DeepSeek raised questions about the dominance of the AI giants in the US market. This led to a significant sell-off in the mega cap tech stocks. Europe has been pushed to review its defence policies, as US military support has become less reliable. The German parliament has voted in favour of a huge fiscal package and changes to the debt brake. Which can be described as a historic turning point in German fiscal policy. While Europe is engaging in fiscal stimulus, the US is actively cutting federal spending.
We expected, that 2025 will bring a more balanced development, as valuations and investor sentiment differentials between the US and the rest of the world seemed extreme.We have witnessed a significant rebalancing from US equities to Europe and China over the past couple of months. That volatility returns with such vengeance surprised most people. Markets configuration had become stretched, as the liquidity backdrop had weakened since the start of the year. The sell-off over the turn of the quarter, intensified by the April 2 tariffs has all the hallmarks of a liquidity event. Deglobalization is not just about trade, people, data, it’s about capital too. In a world of economic nationalism, capital is at risk to deglobalize too. Potentially, one of the big stories of the next few years.

GLOBAL FIXED INCOME MARKETS

Global macroeconomic developments in the first quarter were significant. The concept of US exceptionalism was called into question, as increased policy uncertainty contributed to a decline in sentiment and growing concerns about a potential recession. In contrast, Germany’s shift in its fiscal regime had a marked impact on Europe’s outlook, causing a stark divergence in fixed income markets. In March, Germany’s parliament passed incoming Chancellor Merz’s plans to ease borrowing restrictions, excluding defence and security spending from the country’s stringent debt regulations. This decision enables the creation of a €500 billion infrastructure fund to operate over the next 12 years. As a result, German Bunds experienced the most significant sell-off across the Eurozone, with yields recording their largest daily jump since the country’s reunification in 1990. Whereas the EU is prioritizing fiscal expansion, the US is prioritizing reduction of the 7% fiscal deficit. Initially, this is coming from reduced spending, what is growth negative.

Although the hopes are, that growth would come from deregulation and tax cuts. US Treasuries demonstrated strong performance.
The turn of the quarter was notable, disappointing consumer reports and sharply falling stock markets led to a flight to safety and briefly brought the US 10yr yield under 4%. The fall in US bond yields are the result of collapsing policy rate expectations, on growth worries. Interestingly, the term premia, a recent key driver of yields, however, continues to point upwards, reflecting a backdrop of rising issuance and uncertainty. The 10r German yields rose from 2.37% to 2.74% at the end of the quarter. Notable divergence was also observed in corporate bond markets. US Dollar-denominated bonds exhibited superior performance to Euro bonds across both investment-grade and high-yield markets.

Japanese government bonds underperformed, as yields surged in response to strong Q4 GDP growth of 2.2% and rising inflation levels. On the other hand, China’s predominantly deflationary outlook served to mitigate the increase in yields. The FED held rates steady at 4.25-4.50% in Q1. At the March meeting, the FED’s Summary of Economic Projections downgraded 2025 GDP growth to 1.7% from 2.1% and core PCE inflation was revised up to 2.8% form 2.5%, signalling rising stagflation risks. This uncomfortable mix of economic data underscores the challenging balancing act ahead for the FED. The ECB lowered its key interest rates twice by 25bp, bringing the main refinancing rate to 2.65%. The ECB staff macroeconomic projections lowered 2025 GDP to 0.9% form 1.1% and increased Euro area CPI to 2.3% from an initial 2.1%.

US DOLLAR

The Dollar had continued its upward trajectory from the fourth quarter. The Bloomberg Dollar Index moved 9% higher during this period. The back and forth of tariff announcements and postponements led to a reversal. Reports of Trump-Putin peace talks sent the Euro higher, which had traded as low as 1.0140 to the USD in early February. The anticipated historic increase in German fiscal spending, along with growing concerns about the negative impact of aggressive tariffs on the US economy accelerated things. In recent years the Dollar has been supported by high US growth compared to the rest of the world, attractive FX carry and strong relative performance of US equities. At this stage, a convergence of growth rates between the US and the other G10 countries seems to be the most likely medium-term scenario. Calls for de-dollarization in the face of escalating tariff wars are increasing. Although the dollar’s share of global foreign exchange reserves has declined from over 65% to 59% over the past 10 year, there is no getting around the US capital market and the dominant role of the Dollar in the global reserve system in the foreseeable future. However, with the seismic shift in global trade underway, geopolitical uncertainties and the different approaches to public finances, great macro trade opportunities are opening up.

COMMODITIES

The Bloomberg Commodity Index was +8.8% on the quarter, with all sub-indices showing positive returns. Precious metals were the strongest component of the index, up 18%, while agricultures, after initials gains, were lagging, +2%. Gold is the top performing assets over the past 12 months, +39%. Gold’s share in global FX-reserves has increased in the past ten years, from 10% to over 15%. In a surprise move, OPEC+ decided to hike supply by 411k bpd in May, following a first hike of 138k in April. The organisation cited “continuing healthy market fundamentals and the positive market outlook” and added that “the gradual increases may be paused or reversed subject to evolving market conditions.” The surprise output hike is probably politically motivated. Longer-term, AI’s growing demand for power, will add to the investment case for key metals. Whether copper for grid expansions and upgrades, or uranium to meet growing low-carbon energy needs. We keep the recommended tactical allocation in commodities at neutral. We remain strategically positive on precious metals. Further, it’s worth to bear in mind, that commodities as a group comprise less than 2% of total global assets under management. It’s a vastly under-owned cohort.

MACRO

Market-based inflation expectations, which are important to monitor, have stayed closer to 2% for most part since the beginning of 2021. The disinflationary forces have been playing out and inflation data have slowed significantly from their 2022 peaks. US headline inflation has fallen to as low as 2.4% y/y in September, however was at 2.8% in February. The FED’s preferred gauge, PCE, has fallen to as low as 2.6% in June,it was reported 2.8% for February as well. This proves the stickiness of inflation above the 2% target. We have pointed out in previous reports that a post-peak globalization world will exhibit stagflationary tendencies.

That growth will be lower than inflation. US President Trump announced tariffs of an unexpectedly high magnitude. In addition to a comprehensive import tariff of 10%, higher tariffs will come into effect for over 50 countries. This comes on the back of an already slowing US economy, while the scale of tariffs has taken markets by surprise. Stagflation risks are rising, as the tariffs will lower US growth and raise prices substantially.

Key will be, that the US government addresses market and business concerns, so confidence could partially rebound. In an ideal world, the US government would outline a negotiation path and clarify its intentions for using tariff revenues to reduce corporate taxes. We live in a debt-dominated world.

Today, financial markets serve as debt refinancing mechanism, more so than as a capital raising vehicles for new investments. US government debt has risen nine times since 2000, gold has risen by the same pace. However, the debt problem is not unique to the US. Volatility can interrupt the delicate debt-refinancing process that dominates the financial markets. In 2025 the first of the maturity walls will be faced, when a significant volume of debt is scheduled to mature, necessitating refinancing or repayment by the issuers.A large part pertains to 5 year bonds issued in 2020 during the pandemic, which were secured at low-interest rates.

In addition to that, the US Treasury needs to refinance 25% of the outstanding debt, approximately $9tn. From that perspective, one might be intrigued to guess, that the Trump administration could welcome an economic slowdown, to bring down interest rates. At any rate, the tariff wars show, it’s important to understand, that a fundamental reorganization of the global economy along with its supply chains, energy systems and underlying technology foundations is taking place.

TACTICAL ALLOCATION

The inflationary forces are structural and secular, on higher debt-load, demographics and on-shoring of manufacturing. We have been in an interim period for the past two years. Inflation risks have picked up at end of 2024. After the recent turmoil, the market currently prices in 75 bp cut by the FED for 2025, and a total of 50 bp cuts by the ECB. Analysts on average expect the US 10year yield to close 2025 at 4.26%, up from 4.16% at the end of 2024. We recommend a neutral allocation in fixed income. We prefer investment grade. We cut high yield to underweight, as the economic slowdown will reverberate through the credit markets. Selectivity and diversification are key. We are mindful of the developments in the commodities, for signs, should inflation risks accentuate.

S&P500 & VOLATILITY

Comparisons are drawn to the 1930s. However, back then it was a severe monetary deflation. It can be expected that China and other economies will likely fight the recessionary forces. The FED so far seems reluctant to re-engage in stimulus, via a larger balance sheet and QE. However, monetary inflation will probably force the FED to step in. Since everything is currently in flux, it is difficult to quantify the economic slowdown. US stocks earnings will decline, as analyst estimates have begun to reflect this, with consensus calling for the S&P500 to earn $266.70 per share in 2025, down from $272.15 at the end of last year. It appears likely that this figure will experience a further decline as the complete effects of tariffs and the widespread ambiguities become evident. We cut the allocation in equities to neutral/underweight amid the increased uncertainty on the various fronts. Things can change day-to-day. We are neutral on US, Europe and China, while maintaining the underweight on Japan. We focus on high quality and diversification remains key.