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This podcast is only for the attention of professional investors in the financial industry. Outerblue by Amundi. Welcome to Outerblue Convictions, Market Analysis and Asset Allocation Views.
- Swaha Pattanaik
Hello and welcome to the latest edition of this monthly Amundi podcast, where we discuss what lies ahead for economies and markets. I'm Swaha Pattanaik, the Head of Publishing. And it's my great pleasure, as always, to welcome Monica Defend, the head of the Amundi Investment Institute. Great to have you here, Monica.
- Monica Defend
Thank you, Swaha. Welcome back to everyone listening to us today.
- Swaha Pattanaik
So, Monica, one of the key market developments that's been playing out since we last spoke is a really notable rise in the yields on longer-dated benchmark bonds. We've seen this occurring in the US, but also in Japan. What's been driving the moves and how concerning would it be if they were to continue?
- Monica Defend
Yes, sure. Let's size the move. Over the last month, we have seen the 20-30 years dated benchmark bonds in the US moving up 20 basis points. The 10-year Treasury did 15 basis points. So, as you said, it's a notable uplift that we have seen. And this was mainly driven to the concern of market participants over the fiscal situation in the United States. In June, we will see the budget bill passed in the Congress. And the idea is that it will be very regressive, meaning that the cuts in the medical aid and the food programs are going to affect primarily the less rich part of the population in the United States. But we do expect debt to stay high and deficit to get larger, and as a consequence, this movement on the long end is justified. Similarly, the movement in Japan was really brutal. And this was in a region that has a debt to GDP ratio that is even higher than the US. And there we have seen an auction that was not a success, with definitely weakening investor appetite and plus some supply concern. Why is it important to look at the long end? Because this is where we get influence on the borrowing costs, on investment decisions, in particular on the corporate side, and on the overall economic sentiment. So at a time of broad macro uncertainty, this is definitely not helping. We believe the next month, month and a half will be key to shed some light along the fiscal discipline that the US administration will push in the country.
- Swaha Pattanaik
So, thank you for laying that out so clearly. There's obviously some increasing investor sensitivity to fiscal discipline and the outlook for fiscal burdens. What's your view at this stage more broadly on fixed income?
- Monica Defend
Well, there is no real clear directionality on the rates, but if I look at the shape of the curve, we really think that probably our main conviction is that the steepening is going to stay. What is influencing the shape of the curve, as we said, is the fiscal situation, but also inflation expectations. On one side, we have inflation that proved to be stickier than than expected. But if we look at the expectations on inflation from the consumers, well, these are not plausible. They are way too high. So, how this translates into our positioning? We remain neutral with a positive bias on the US. And we continue to monitor the yield movements to see if valuations will get us a more attractive access to the market. On the Japanese bonds, we progressively became more cautious. We are still underway duration and we do expect the Bank of Japan to deliver a further hike. In Europe, so Euro area and UK, we are still constructive on duration, but over the last month we've been calibrating a bit the position on peripherals. What is key is to look at the macro development, in particular in Germany, though we think this will be fully displayed in 2026. And we will wait for the ECB this week. The ECB probably is in a more comfortable situation when compared to the rest of the central banks in the developed markets.
- Swaha Pattanaik
So let's stay with the monetary policy. What are you seeing ahead for central banks, given the really complicated situation that you've just described and all the uncertainty and flux out there?
- Monica Defend
Well, we do believe that the rhetoric of data dependency will stay on. When it goes to the Fed, it's also a policy dependency. Again, with the movements that we have seen on the markets, real rates have been moving higher on the back of a repricing of the markets' expectations on the Fed action. For the time being, we still stick to the case of three cuts, having in mind that a slowdown is in the pipe. Still, there is a gap between the hard and the soft data, whether this will come. in July or probably postponed to September. Let's give us a chance to have a last reading to the numbers that will be released. On the ECB, as I said, it's less noisy, the environment around the ECB. So we do believe that they will deliver three cuts, 25 basic points each time this year, and we have a terminal rate of 1.5%. This should support the economic pattern in the Eurozone. We have a 0.8% for the year, but as we always mention, there are big divergences if we consider Spain that is taking the lead versus Italy, France and Germany. Eyes open on the Bank of England, where we see some pressure on the bank to reduce the pace of quantitative tightening. And on the Bank of Japan, we are probably more hawkish than the market, and we expect the policy rate to reach 0.75% by the third quarter this year. Again, given the uncertainty around the growth, we might likely observe further volatility.
- Swaha Pattanaik
You keep mentioning the uncertainty, the difficulties that markets have in seeing ahead, but looking at equity markets, they really are inclined sometimes to look at the bright side because tariff rates may be in the US the highest in nearly a century on average, but the stock market's been pretty resilient in the face of that. What's your view on how solid the foundations are of the rebound we've seen in equities?
- Monica Defend
Yes, indeed. As you were saying, there are kind of anomalies on the markets. We have seen the US dollar and the treasury breaking the correlation while the equity market continues to rise. If we stick to fundamentals, the reporting season was good, was overall good, better in the United States than in Europe and apparently with this pause on the tariffs, because we don't know how the story will end, we might appreciate some further steam on earnings. We have a 5% earnings growth expectation for this year, 3% in Europe, which is below, by the way, what the market expectations are. With that in mind, on the real economy, there is this question mark on growth and inflation that at some point will be reflected also in the earnings. So in our opinion, it is really key to stick to sector and stock picking, and sectors probably try to focus on those sectors that are broadly insulated for tariffs, if any opportunity is there. So stick to good balance sheets, stories and quality.
- Swaha Pattanaik
Thank you, Monica. We're nearly out of time, but let me ask you one last question on emerging markets. How are they holding up in the face of this uncertainty and the tariff rate volatility that some of them have been facing, notably China?
- Monica Defend
Well, you know, with the US dollar that is broadly weakening, the Fed that in any case is on an easing stance mode, this is positive for the emerging markets. So, we confirm the preference for emerging Asia with the equity front that could benefit from this pause in the tariff story. In Taiwan, the tech sector is, again, this is more a long-term story, we believe, from an investment perspective, while we are cautious on the other sectors in in the country. India, long story, maintain its optimistic stance. But valuations are somehow expensive. But again, with the tariffs, India can be one of the winners if we consider the region. Latin America, again possibly for the main reason, the reallocation of supply chain and insulation from tariffs on certain countries. On EMEA, again, positive stance with a preference for emerging Europe versus Middle East and North Africa. Fixed income and central banks, there is ample space for the central banks in the emerging market area to cut policy rates. So, we are constructive both on local currency and hard currency bonds. But again, it is necessary to maintain a selective approach.
- Swaha Pattanaik
Monica, thank you so much. You've covered so much ground, as always, in such a short, allotted space of time. Thanks for joining us.
- Monica Defend
Thank you Swaha.
- Swaha Pattanaik
And thank you, all of you, for joining us on this podcast. We look forward to having a special Mid-Year Outlook review with Monica next time. Do join us for that and check out our other podcasts on our Research Centre or on your favourite podcast platform.
- Disclaimer
This podcast is only for the attention of professional investors, as defined in Directive 2014-65-EU, dated 15 May 2014, as amended from time to time on markets and financial instruments, called MIFID II. Views are those of the author and not necessarily Amundi Asset Management SAS. They are subject to change and should not be relied upon as investment advice, as a security recommendation, or as a security measure. or as an indication of trading for any Umundi products or any other security, fund units or services. Past performance is not a guarantee or indicative of future results.
