The past month was dominated by three elements of uncertainty: the conflict in Iran, developments in the AI ecosystem, and the health of the economic cycle in the United States and the old continent. On the conflict front, investors have benefited from a clear easing of tensions: a sixty-day truce was agreed upon during which the parties must finalize crucial dossiers such as nuclear issues and the right of passage of ships through the Strait of Hormuz.
OIL, AI AND THE FED’S TURNING POINT
Meanwhile, the resumption of crude flow to about 15 million barrels per day has favored a marked drop in oil prices, not only on the trading date but along the entire futures curve. To the point that some analysts have begun to speak of a possible oversupply, with a risk of further price declines which, if confirmed, could support consumer confidence and reduce the defensive stance of central banks, with the ECB today very focused on the second-order effects of inflation.
The AI ecosystem, on the other hand, has experienced increased volatility linked to the semiconductor and memory segment. Some stocks, coming off stellar performances with triple-digit returns since the beginning of the year, have shown a slowdown amid renewed uncertainty about the expected returns from hyperscaler investments, which for now continue to remain above expectations.
On the third element, the state of the economy and central bank monetary policy expectations: June saw a 25 basis point hike by the ECB, in line with market expectations, and the first press conference of Warsh at the helm of the Fed, summarized in a key concept: the regime change. The new chair’s intention is to eliminate the so-called “forward guidance,” i.e., the explicit indication of the rate path, to reduce volatility fueled by investor sentiment and refocus attention on the health of the economy and the central bank’s reaction function.
FROM GEOPOLITICAL RISKS TO FUNDAMENTALS
The market’s response was a generally hawkish reading, with a correction in the bond sector amid a more polarized Fed committee, conflicting voices, and the possibility of further rate hikes in the presence of growth close to potential, a solid labor market, and inflation still above target. These topics will be the focus of the task forces designated by Warsh in the second half of the year: five units tasked with changing the Fed, from communication to the methods by which inflation and employment are calculated, to bring it up to date in the AI era and bring it closer to the private sector segment that uses near real-time data.
June thus represented a transition period. Markets moved from a phase dominated by geopolitical risk and inflation fears to a phase in which attention returns to focus on macroeconomic fundamentals, monetary policy, and corporate earnings. Looking ahead, the main candidate to lead markets remains the evolution of inflation: a return toward the target would facilitate the normalization of equity-bond correlation regimes, benefiting multi-asset portfolio construction.
PORTFOLIO CHOICES
On the central banks front, markets still price in one more hike for the ECB and almost two hikes for the Fed. These levels appear more than sufficient to contain inflation expectations and, especially in the euro area, offer a good buying opportunity, particularly in light of current long-term real rates, which in our view exceed growth potential.
Finally, the issue of valuations in the AI sector remains open: the various segments of the ecosystem will likely remain volatile, sensitive to news on new technological developments and on the use of residual capacity in hyperscaler data centers. For this reason, we remain more cautious on the technology segment, preferring profit-taking and a marginal reduction of overall portfolio volatility, in favor of other sectors, such as financials, which could benefit from the cycle and investment rotation, while maintaining a constructive view on the equity component.
BONDS AND THE MACRO SCENARIO
On fixed income, we are now more constructive, diversifying risk sources across selected geographies, avoiding excessive duration concentration on longer maturities in a phase of renewed volatility, also fueled by fiscal concerns in Japan, and instead favoring the mid-parts of the curves.
The macroeconomic picture remains overall supportive: the decline in oil should favor a recovery in confidence in Europe, while the June US labor market data, weaker than expected, could ease restrictive expectations on the Fed, helping to support the cyclical rotation observed in recent sessions.
