Investment Viewpoint: Comfortable positioning amid cross‑currents in markets

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Markets and macro insights with Brian Flavin, Senior Equity Research Analyst

Key takeaways:

1. Global equities rose modestly in euro terms (driven by the US) while bond markets were weak.
2. Equities are focused on earnings resilience and growth momentum in technology, while bond markets are signalling caution on persistent inflation, higher oil prices and limited scope for central bank to ease policy.
3. Stronger US inflation and producer price data reinforced the bond market view that inflation remains uncomfortably firm, while better retail and industrial data in the US points to ongoing economic resilience.
4. Positioning remains aligned to a world where global growth runs modestly below trend.

Financial markets were mixed last week. Why was that?

• Financial markets were mixed last week, although the tone has remained broadly constructive. Global equities moved modestly higher in euro terms, driven by the US, with Rest of World markets underperforming. Bond markets were weak however, as sovereign yields drifted higher through the period.
• In broad terms, investors are still willing to pay for select growth and technology exposure, but the fixed income market continues to signal some caution around inflation, policy rates and the impact of higher energy prices on the macro-outlook.
• Within equities, the tone remains constructive overall, but breadth of performance is narrow. US indices continued to set the pace, with the Nasdaq and S&P 500 outperforming, supported by select large-cap technology and communication services. European equities, including the UK, underperformed due to sector mix and a weaker macro-outlook. In Emerging Markets, the picture has also been mixed and in Asia somewhat narrow, with index performance in some markets there also heavily influenced by a small number of large technology and semiconductor-related names.
• Sector leadership still points to a market that is rewarding earnings visibility and structural growth. Select technology and communication services were among the stronger areas throughout last week, with momentum remaining intact.
• More cyclical or rate-sensitive segments have been less consistent. Energy has remained important in the background because of oil-price volatility, and with prices still elevated (although not extreme), it continues to influence both inflation expectations and broader market sentiment.
• US Treasury yields moved higher, with the 10-year Treasury moving above the 4.5% level. Core European yields also rose over the week. The German 10-year moved above 3.1%, while UK gilts have come under more sustained pressure, exacerbated by the political uncertainty there. 10-year gilt yields moved above 5.1%, underperforming peers. Japanese government bond yields also moved higher over the week, with the 10‑year yield pushing to multi‑year highs around the 2.6%–2.7% range.
• That combination points to some reassessment of the near-term rates outlook and suggests that, despite a still supportive equity backdrop, fixed income investors are demanding more compensation for inflation and fiscal risk.

What is the cross-asset message telling us?

• The cross-asset message this week is quite clear: equity investors are focusing on earnings resilience, strong momentum in technology and the absence of an immediate growth shock.
• Bond investors, however, are paying more attention to inflation persistence, higher oil prices and the possibility that central banks may have less room to ease than markets had hoped.
• For now, equities are looking through that tension more comfortably than bonds, but it did pressure equities at the end of last week.

What were the key macro signals driving markets last week?

• Macro data reinforced the diverging sentiment across asset classes. In the US, headline consumer inflation rose 0.6% in April, which was in line, but core inflation accelerated to 0.4% (consensus: 0.3%).
• That was followed by a strong April PPI release, with final demand prices up 1.4% month on month following an upwardly revised 0.7% gain in March and well above forecasts of 0.5%.  That was the biggest increase since March 2022.
• These data support the bond market view that inflation remains uncomfortably firm and that central banks may have less scope to ease policy than markets had previously hoped.
• On the other hand, underlying US retail sales for April were up 0.5% month on month (consensus: 0.4%) and US industrial production in April was also stronger than expected, suggesting a still resilient US consumer and economy, despite higher gasoline prices there.
• Outside of the Middle East, the other key geopolitical focus of the week was on the US-China Summit where signals on trade, the Middle East and technology were mostly seen positive, albeit a little underwhelming. Still, this helped some markets to continue to broadly look past the Middle East conflict for now, although risks remain.
• While we still expect a path towards resolution, lingering supply and pricing issues in energy markets are likely to weigh on growth and continue to pressure more traditional, energy‑intensive parts of the economy.

The week ahead: what to watch out for

Looking ahead to this week, we expect the global flash Purchasing Managers Indices (PMIs) due late in the week are likely to be the clearest read on whether recent concerns around inflation, growth and policy uncertainty are beginning to weigh on business activity. Outside of that, attention is likely to focus on the release of the latest Fed minutes, final euro area CPI as well as UK labour market data, CPI and retail sales.