The CIO office’s view of the week ahead.

Last week, President Donald Trump announced a 5% tariff on all imports from Mexico to take effect from 10 June unless the Mexican government moves to stem illegal immigration across the US-Mexico border. This rate could then rise by 5% each month to reach 25% by October if the US is not satisfied with Mexico’s response. Mexico has been one of the beneficiary countries of the US-China trade war, its trade balance with the US widening as China’s narrows. Markets have corrected as recession risks have increased, with the S&P 500 suffering one of its worst months in May. We maintain our puts in portfolios as the global outlook deteriorates.

Bonds, on the other hand, have outperformed, with the short end rallying aggressively, allowing gold to rise. At the same time, as recession concerns rise, credits are starting to underperform, including those of peripherals like Italy, where the idea of introducing “mini-BoTs” as a parallel currency to the euro has been recently revived. Markets have retreated and turned risk-off, with European banks as well as energy sector assets suffering as a result. In this environment, we remain underweight Italian, peripheral and high-yield bonds in portfolios.

We are seeing the rise of some defensive M&A. The Fiat Chrysler and Renault merger currently on the table would create the third largest auto group in terms of car sales. If successful, however, the merger would not address the structural problems now facing the industry, which are being exacerbated by the ongoing trade war. Beyond consolidation, increased investment will be required by the auto industry as it grapples with the shift to electric cars. One thing we can be fairly certain of in the wake of the Fiat Chrysler-Renault deal is that others across the sector will follow suit.

César Pérez Ruiz, Head of Investments & CIO

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