1. Summer wall-climbing.
We argued that as the distribution of risks around tariffs compressed, the avoidance of bad outcomes would create a “narrow path” higher for carry and risk assets and a wider one for continued USD weakness and curve steepening. These trends remain intact, helped by reassuring news flow: underlying US inflation has been lower than expected; trade uncertainty measures have fallen further; fragility at the long end of global bond markets has been contained so far; and the impact of tariffs on growth and inflation has not yet validated the worst fears. The recent conflict in the Middle East is a reminder both that new policy shocks can surface, but also that unless the worst outcomes materialize, they can create a “wall of worry” for markets to climb. As markets relax again, other risks may move back into focus: fresh tariff news, potential for more visible weakening in the US growth and jobs data, or the upcoming fiscal package. While markets may eventually climb over these too, hedging long positions into the key events still seems worthwhile. Given that growth weakness has reversed faster than policy tightening fear since April, a dovish tilt from the Fed could reinforce the upside along the narrow path if near-term inflation news stays benign. That would also provide fresh impetus to Dollar weakness—our strongest market view—and to EM local assets, and we continue to expect longer-term pressures towards lower oil prices and steeper curves.
