The duration and intensity of the shock related to the conflict in the Middle East are destined to have persistent effects on the global economy. Compared to the beginning of the year, the macro scenario today appears weaker, with more contained GDP growth, higher inflation, and more restrictive central banks.
BETWEEN RESILIENCE AND RISKS OF SLOWDOWN
It remains to be seen whether the global economy will be able to maintain good resilience, supported by structural factors such as investments in artificial intelligence and defense, or whether more marked risks of slowdown will prevail.
THE RISK OF A STAGFLATIONARY SHOCK
The war in Iran risks producing a stagflationary shock linked to high energy prices, with negative effects both on the economic cycle and. However, compared to the 2022 shock, the impact should be more contained thanks to more favorable initial conditions and greater demand resilience. There remains the risk that limited flows of raw materials from the Gulf area and persistently high prices could amplify inflationary pressures and depress growth disproportionately.
UNITED STATES BETWEEN INFLATION AND PRUDENT FED
In the United States, our expected growth estimate for 2026 stands around 2.1%, but the most recent data signal a less solid picture than expected. After the acceleration of inflation observed in previous months, the price level is destined to remain high, while the labor market continues to show signs of resilience. In this context, the Fed appears inclined to keep rates unchanged in the short term and could consider the possibility of a hike towards the end of the year or early next year. However, the appointment of the new president Warsh could, over time, favor a slightly more accommodative stance.
EUROZONE, ECB AND ENERGY PRESSURES
In the euro area, the macroeconomic framework is progressively slowing down: PMI data indicate clear expectations of a slowdown in macroeconomic growth in the second quarter accompanied by price pressures. Inflation, which came out at 3% in April, should consolidate at these levels in the following months if the price of oil stabilizes around 100 dollars. In this case, the ECB would move within the baseline scenario they outlined, which implies the possibility of up to two hikes during the year. In their adverse scenario, with higher energy prices and inflation aiming at 4%, the ECB would be forced to consider up to 4 hikes to keep inflation expectations anchored in the medium term. At the moment, expectations are for a couple of hikes during the summer.
BONDS AND RATE RISK
Overall, the fixed income stance remains cautious and neutral, in light of still high geopolitical and inflationary risks, particularly linked to oil prices and global energy flows. US Treasury yields touched relative highs of recent months in early May, but we are still not confident in increasing exposure to rate risk, given the uncertain context both geopolitically and macroeconomically. In the euro area, there is a risk that the ECB will be forced to carry out more hikes than priced in by the market if energy prices remain high, despite increasing recession risks. This makes it premature to take a constructive view on duration.
BUND, PUBLIC DEBT AND FISCAL RISKS
The recommendation is therefore to maintain a neutral position on Bunds, highlighting the risks linked to inflation, rising deficits, and increased debt issuance, while recognizing that yield levels above 3% could represent a threshold to monitor for considering a more constructive exposure.
ITALIAN SPREADS AND ECONOMIC RESILIENCE
Italian spreads remain relatively compressed, but Italy – like France and Germany – is not immune to increasing fiscal pressures related to energy subsidies and the slowdown in economic growth. The BTP spread could continue to move within the range observed in recent weeks although there is a risk that a macroeconomic slowdown could penalize Italian bonds.
CREDIT, CURVE AND DEFENSIVE APPROACH
The credit sector shows a more stable and overall still positive sentiment and is more attentive to economic growth. Within Investment Grade bonds, compressed spreads and limited upside potential suggest that we will face a context of greater dispersion of yields rather than a generalized rally. After hikes in the short part of the curve, supported by expectations of official rate increases, the best opportunities, in terms of risk-return, seem to be on the short part of the credit curve, while areas where spreads have tightened – such as bank Tier 2 and hybrid instruments – justify a reduction in exposure. In summary, with growth risk still underestimated, a selective and defensive approach is preferable, focusing on medium-short maturities and diversification.
