Highlights
After falling and then rebounding dramatically in April, equity markets continued their recovery in May, this time supported mainly by easing trade tensions between China and the U.S.
Summer looks set to be volatile in the financial markets, with the U.S. administration negotiating both trade relations with its main partners and its tax plan with the Senate. However, some parameters are starting to fall into place.
On the tariff front, although anything can happen, the realignment of the Trump administration brings us closer to levels that are more tolerable for the economy. Besides, in its current form, the budget plan appears to be broadly in line with election promises and is, therefore, not set to significantly alter the trajectory of the budget deficit which remains abnormally high.
Ultimately, the fate of financial markets remains largely dependent on the measures taken by the Federal Reserve once all these changes settle. With economic data still largely positive, it can afford to wait.
Overall, aside from the daily noise, the resilience of the economy and markets suggests that equities could remain on their upward trend relative to bonds, confounding widespread investor pessimism as has often been the case in the past.
Bottom line
While the economy is set to slow down, a global recession remains an alternative scenario provided that the Trump administration's immediate priority continues to be securing trade deals and implementing policies conducive to growth. As such, although the risk level of our strategy remains measured, we are now slightly overweight equities, while the outlook for emerging markets appears to be improving.