Weekly View – Dot-com bond?
The CIO Office's view of the week ahead.
The knock-on effects of Trump’s tweets have jumped from the equity and bond markets to the economy to central banks and now currency markets. Indeed, the trade war turned tech war now increasingly resembles a currency war and a race to the bottom. The Chinese currency depreciated below CNY 7/USD after the Chinese authorities seemingly let the currency weaken on the back of Trump’s latest tariffs announcement, earning them the ‘currency manipulator’ designation by the US Treasury Department. The weaker renminbi will have a deflationary impact on the global economy, while at the same time partially offsetting the adverse economic effects of Trump’s latest tariffs on the Chinese economy.
With negative-yielding bonds now composing over a quarter of the investment-grade bond market, topping USD 15 trillion, investors are piling increasingly into riskier credits and equities. The momentum behind this shift could create a bubble as valuations get stretched and alarming signals arise (the Austria 2117 government bond is up +62% year-to-date and negative-yielding mortgages are being issued in Denmark). Bond markets are pricing in a recession and volatility has returned with renewed vigour. The broad assumption that central banks will continue to provide support through easy policy has led to further yield curve flattening. Gold has rebounded as a result and we have updated our three- and 12-month forecasts to USD 1,440 and USD 1,600 per troy ounce, respectively.
Discouraging data out of Germany last week suggest Europe’s biggest economy had negative growth in Q2, to be confirmed by GDP numbers released on Wednesday. Globally, PMI numbers paint a grim picture, with only the US and emerging markets hovering just above contraction territory. Oil prices collapsed after Trump’s latest tariff tweet, shadowing major equity indices. We still believe we are in the midst of global ‘slowbalisation’, but that a recession is not imminent, although the risks of one have increased. In this environment, we continue to like pricing power companies that can sustain the slowdown.
César Pérez Ruiz, Head of Investments & CIO, Pictet Wealth Management