- Bonds and gold have rallied. So have Chinese and European stocks.
- Cryptos have once again proven their beta to risk, selling off with a rise in risk aversion.
- We are not convinced if the US fixed income rally is sustainable.
- Large tax cuts, unmatched by spending cuts, would keep the federal budget deficit under pressure.
- Call of the hour: geographical and multi-asset risk diversification.
Related Insights
Commentary: The uncertainty trade
There is remarkable macro divergence at play among key economic blocs presently. The US economy is showing signs of slowing amid great policy uncertainty. Europe, faced with an historical weakening of its alliance with the US, is ramping up spending. China, after years of property market distress and external challenges, is finding its feet with a decisively supportive fiscal/monetary/structural policy agenda. But the overarching theme is the worsening of growth momentum in the world’s largest economy.
Unsurprisingly, consumption and investment sentiments have faltered. In expectation of a slowdown, US government bonds have rallied. Meanwhile, fears of sticky inflation and lack of clarity about geopolitics have helped gold rally. Volatility traders have had a good month. European and Chinese stocks have rallied, while US stocks have retreated. DM currencies have rallied against the USD, while EM currencies have been steady. Cryptos have once again proven their beta to risk, selling off with a rise in risk aversion.
These trades have worked in 1Q, but there is a good chance a few different ones would be on the table as 2Q gets going. We expect policy uncertainty to persist, especially with announcement by the US on reciprocal tariffs looming. We are however not convinced that the fixed income market rally is sustainable.
Growth slowdown worries are justified, but that does not guarantee substantial Fed rate cuts this year. Two factors complicate that picture. First, inflation is already sticky, and would face mounting upsides as tariffs and immigration tightening measures are combined with tax cut-driven fiscal impulse in 2Q. Second, despite all the DOGE-related headlines, the chance of a meaningful improvement in the fiscal picture is slim. The planned cuts in federal depending barely scratch the surface in bringing the deficit down, with the tax cuts in the pipeline likely to overwhelm any likely savings. As the market comes to terms with ever larger supply of treasuries, the long-end would sell-off. This in turn would risk a substantial steepening of the yield curve if the Fed cuts.
In a scenario in which inflation, deficit, and interest rates remain hight, risk aversion would spike heavily. It would create both economic and political turmoil, primarily in the US, with some attended spillover risk for the global economy. The portfolio manager’s imperative for geographical and multi-asset risk diversification has never been greater.
To read the full report, click here to Download the PDF.
Topic
GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates, Digital Assets or Commodities)[1]
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
[#for Distribution in Singapore] This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
[1] This disclaimer may not apply if they are falls within 'financial instruments' that are within the scope of Article 2(1) EU MAR (e.g. financial instruments that are traded on a regulated market, MTF or OTF, etc.). Section C of Annex I of MiFID2 specifies these 'financial instruments'.