Monthly House Views - Market turmoil amid a trade war

The backflips of Donald Trump on tariffs
After the announcement of widespread and massive increase of tariffs rates, President Trump finally returned to a more moderate increase of 10% vis-à-vis all his trading partners, at least while negotiations continued. The notable exception remains China, with an increase in retaliatory announcements from both sides. In addition, tariffs on Mexico and Canada as well as on certain sectors are maintained. In this context, the markets alternate between marked mistrust and euphoria, depending on the back and forth. 
While uncertainty about past and future announcements remains high, to this date the confirmed tariff increases appear significant for the United States. The country's activity could slowdown further with also an increasing risk of a further rise in inflation. Europe appears more protected, with more support from its central bank as well as recently announced fiscal plans (Rearm Europe and the German plan). China would also be penalized, but the authorities would limit the impact through expansionary fiscal policy.

Reducing our exposure to the United States
In response to the escalation of the trade war and the tensions on the financial markets, we are stepping up our "downsizing" movement on the US markets that has been taking place in recent weeks. We maintain our Underweight on US equity markets, decided just after the Liberation Day announcements, as well as on the country's government bonds. We also move to Underweight on the dollar against major currencies. At the same time, we remain overweight in European equity markets, a region that has counter-forces at the fiscal and monetary levels. 
Overall, we are cautious on government bond markets, which could remain very volatile in a context of lower growth risk with more inflation and financial shocks. However, we remain Overweight on gold and we structurally maintain a very diversified allocation in terms of assets and geographies.

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