Weekly View – MAY DAY, MAY DAY

The CIO office’s view of the week ahead.

As the results of European Parliament elections roll in, some unexpected outcomes are taking shape. While populists across the Union did win new seats, they did not fare as well as expected, while Green parties gained significant ground as voter turnout rose for the first time in four decades. Surprises at the country level could also lead to greater political instability for some constituents. In Greece, Alexis Tsipras’s Syriza party defeat means the Greek prime minister will likely call early elections, while in Germany the rise of the Greens has pushed the Social Democratic party into third place for the first time in nationwide elections. In the UK, Theresa May’s resignation statement last Friday and the Brexit party’s victory in European Parliament elections mean the risk of a hard Brexit has gone up.

Outside of Europe, the ongoing US-China trade war is now becoming a tech war, as we had anticipated, with Donald Trump moving to put Chinese telecoms giant Huawei on an export blacklist. US tech giants Intel, Qualcomm and Broadcom cut off their dealings with Huawei with immediate effect, following Google’s cancellation of Huawei’s Android licence. Trump subsequently suggested Huawei could ultimately be part of a trade deal with China, although US officials maintain that as a threat to national security, it should be a separate matter. Markets moderated and oil fell last week as investors took caution. We maintain our protection in portfolios as we think markets are still too complacent, are neutral in tech and underweight equities more broadly.

The Fed reconfirmed its commitment to keep interest rates unchanged in its latest meeting as its focus remains on inflation and the yield curve over trade tensions. We believe that markets will keep the Fed under pressure to act. If financial conditions were to tighten as a result of an inverted yield curve and/or a further drop in stock prices, the Fed may be forced to cut rates eventually.

César Pérez Ruiz, Head of Investments & CIO

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