Despite a few skirmishes, the ceasefire between the United States and Iran is holding, with weekend talks in Switzerland reportedly yielding significant progress. Brent crude remains around or below $80/b and could ease towards $70/b over the course of Q3.

In this report, we assess the market implications and outline key investment ideas for Q3 around this central theme.

  • In fixed income, we take a contrarian stance relative to central banks’ hawkish bias, arguing that the rate hike cycle will prove short-lived. Inflation expectations are already declining, although policymakers still need clearer evidence that second-round effects are absent before softening their stance. At his first FOMC meeting as Chair last week, Kevin Warsh struck a hawkish tone, reflecting the need to build credibility in returning inflation to the 2% target. While bond yields appear attractive, it may take time for them to decline at the short end, and, by extension, along the long end of the curve. The Fed’s hawkish stance has weighed on gold, which remains caught in the cross-currents of higher real rates. A meaningful rebound may therefore take time. Fundamentals have also softened, as elevated prices weigh on jewellery demand and some central banks have turned sellers. That said, the PBoC continues to be a steady buyer.
  • In equities, we recently highlighted that industrials and consumer cyclicals have been negatively correlated with oil prices and should therefore benefit from the pullback. However, consumer-related themes remain constrained by weak demand. We remain cautious on luxury and particularly autos. Instead, we favour energy-intensive segments within industrials, such as airlines and capital goods. In this context, our German stimulus basket remains well-positioned, offering both exposure to energy-intensive sectors and a macro tailwind from the push to accelerate infrastructure spending.

Japan vs. China. Japan remains one of our strongest overweight positions in equity allocation, while we have fully avoided China since November last year. Reassessing the theme, we see renewed appeal in Japanese equities, supported by (i) a USD/JPY driven by Fed policy, (ii) robust earnings momentum, and (iii) the ongoing reallocation of household savings from cash into domestic equities. − Meanwhile, China remains mired in unbalanced growth, an ongoing real estate adjustment, and weak consumer demand. While the slowdown could eventually trigger policy stimulus, and we would stand ready to turn more constructive, this remains a long-anticipated catalyst, and we are not inclined to “pay to see.” That said, the growing divergence between onshore and offshore Chinese equity markets is notable, suggesting that there is a confidence crisis with foreign investors.