Weekly View – WHATEVER IT TAKES 2.0

The CIO Office's view of the week ahead.

Last week, Mario Draghi made waves in Sintra at the European Central Bank’s (ECB) annual symposium. The ECB president gave a very dovish speech, vindicating markets’ high expectations and eliciting Trump Twitter censure. Draghi came as close as possible without actually committing, declaring that the central bank stands ready to act by using all instruments and flexibility at its disposal within its mandate. We now expect the ECB to adjust its forward guidance in July to indicate that policy rates will remain at present levels or lower through at least the first half of 2020. We also expect the central bank to cut the deposit rate by 10 basis points to -0.5% in September. As a result, we are turning more positive on European credits.

In the same week, Draghi’s US counterpart Jerome Powell added his own dose of dovishness, firmly signalling an imminent rate cut. He cited political noise, particularly around the US-China trade tensions. The Fed has now done everything short of cutting rates, which we now expect it will start to do at the end of July. Whether this is enough to quell Trump as he launches his re-election campaign is far from certain, especially following the escalation of his direct criticism of Powell, now calling for his sacking. The dollar weakened as gold soared to a six-year high.

Markets on all sides of the US continue to anticipate or react to Trump’s latest geopolitical escapades. High on the anticipation list is the G20 summit in Osaka, where the US and Chinese presidents are expected to meet for trade discussions on the sidelines this week. Given the history of their discourse, the only thing that seems sure is that the outcome could fall anywhere on the spectrum from game-changingly negative to positive where it comes to trade and the global economy. We like Chinese domestic assets for this reason – regardless of what happens with trade, they should benefit from the Chinese government’s committed stimulus measures. More frighteningly, if Trump continues to play with fire with Iran, we can expect continued energy and gold price appreciation.

César Pérez Ruiz, Head of Investments & CIO, Pictet Wealth Management

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