Neil Sun, Portfolio Manager on the BlueBay US Fixed Income team, discusses how US policy decisions are leading to transformative changes in Europe.
Watch time: 3 minutes, 26 seconds
View transcript
Welcome to the latest edition of The Weekly Fix. My name is Neil Sun.
In this week’s episode, we will be exploring the shifting dynamics between the US and Europe, as signs of American exceptionalism begin to wane and Europe experiences a financial awakening.
First up, let's talk about Europe's bold moves. German leaders, particularly Christian Democratic Union (CDU) head Merz, have proposed a staggering €500 billion infrastructure spend over the next decade. This plan also comes with a notable adjustment to defense spending, potentially exempting a portion of it from debt brake calculations. This is a truly transformative moment for Europe, with the possibility of further spending increases beyond Germany. The expansionary spending package has led to a significant selloff in European rates, the largest since the 1990s. Market participants revised higher European rates expectations for the medium term, driven by the ECB potentially skipping a cut in April and a continued re-rating of the term premium.
Across the Atlantic, the US market is experiencing its own turbulence. Growth fears are back on the table like a déjà vu of events we have seen in 2022. Some of the recent surveys and expectation-based data indicate a weakening trend amidst policy uncertainty. Those concerns are impacting the markets, as investors start to look for safe harbors, potentially moving from the more volatile growth stocks and into Treasury bonds. And speaking of changes, the post Trump-election bounce, or often called the “US exceptionalism trade”, is seeing a bit of a reversal. The winds are shifting, and as a result both momentum and tech stocks are feeling the pinch. These sectors are usually the darlings of growth investors, but they are now facing headwinds as confidence wavers.
We would note, however, that despite all the concerns, the ISM service data remained robust, and the health of consumer and employment conditions continue to underpin the economy, in our opinion. While growth might undershoot earlier expectations, we do not see a US recession as a base case scenario, especially once the policy fog of uncertainty eventually lifts.
So, what does this mean for investors? We believe that during time of increased volatility it is prudent to adopt a defensive positioning in portfolios, as we have done in recent months. This involves prioritizing allocations to high-quality bonds and focusing on shorter-duration fixed income securities until there is greater clarity on the impact of tariffs and economic data trends in the United States. While we do believe a buying opportunity in fixed income could emerge soon, we just don’t think we’re there yet.
Thank you for watching, and good luck investing!
Key points
Signs of American exceptionalism have begun to wane, while Europe experiences a financial awakening.
The European expansionary spending package has led to a significant selloff in rates, the largest since the 1990s.
In the US, growth fears are back on the table and some of the recent surveys and expectation-based data indicate a weakening trend due to policy uncertainty.
We believe that during times of increased volatility it is prudent to adopt a defensive positioning in portfolios.
