Crédit Mutuel AM: Global economy - between hopes and uncertainties

The situation has not fundamentally changed since last month. Trade tensions remain at the forefront, with new announcements almost daily, whether concerning China, Europe, raw materials, or even legal matters.
Regarding the latter point, the decision by the New York International Trade Court, ruling that the IEEPA (International Emergency Economic Power Act) invoked by Donald Trump did not allow him to impose such trade sanctions, is not expected to radically change the situation: the Trump administration has other means at its disposal to implement its trade policy (Sections 122, 232, or 338).
While uncertainty will likely persist through the summer, the question now is whether the markets are right to take the de-escalation of recent weeks for granted. The expression "Trump Always Chickens Out" (TACO) aptly illustrates the current dominant thinking: in the event of market and/or economic disruptions, Trump will quickly pivot.
We do not disagree with this, especially considering that investor positioning remains weak in equities (particularly systematic strategies). The very strong rally of recent weeks has taken a significant share of investors by surprise, which could generate positive flows into risky assets in the coming weeks. So far, these flows have remained anemic.
Another point supporting this thesis is the overall resilience of the global economy. In the United States, risks seem to be receding with a rebound in surveys and a still-resilient job market. Europe is also fairly stable, with the added hope that German fiscal stimulus will generate positive impacts in the medium term. This hope could lead consumers to dip into their savings, which have increased significantly post-Covid. The same is true in China, with authorities, while not having stimulated the economy as they did in 2015 or 2020, continue to provide gradual support.
A favorable economic context in the face of growing risks
Finally, it should be remembered that the decline in the dollar and oil prices are powerful drivers for the global economy in the medium term. The latest reassuring inflation figures in the United States may even give hope hope that the Fed will be more responsive than expected in the event of problems.
While this scenario is currently favored by the market, we believe it underestimates several risks.
The first risk concerns the consequences of the trade war, which so far appear nonexistent. However, we believe that the increase in customs duties will inevitably have an impact on either prices or margins. The latest ISM manufacturing survey is quite telling in this regard.
The second risk concerns the bond markets, and more specifically the long ends of the US curve. The tax reform currently being debated in the Senate is likely to further increase US deficits, while discretionary spending cuts have been virtually non-existent so far. This lack of fiscal discipline raises the risk that term premiums will continue to rise and 30-year rates will exceed 5%, the level at which they have been hovering for several weeks. We believe that a knee-jerk reaction from bond markets following a failed issue or negative flows from international investors is a plausible scenario at present.
We are currently maintaining limited active risk in our portfolios given a geopolitical situation beyond our control. We continue to favor European bond assets due to the virtual disappearance of inflationary risk in the eurozone, while gold still appears to be the asset of choice.
June Outlook
We remain broadly close to our indices due to a market dominated by unpredictable geopolitical news. Beware of two summer risks: disappointing growth data linked to the consequences of the tariff war and potential tension on long-term rates.