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2025 Wealth Insights
Investment Strategy Bulletin
FX Focus

Riding on Fiscal Policy

8 Aug 2025

The Chief Investment Office recently added an “overweight” rating European equities as the scope for flows and policy support remains high. Read more about our latest observations for European equities.

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Building Quality into Portfolios

18 July 2025

In our latest Global Investment Committee Asset Allocation, we continue to view quality companies as being best positioned to weather volatile and highly uncertain trade, geopolitical and macroeconomic environments. These companies tend to have strong fundamentals and stable earnings which may weather them through a range of economic conditions.

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Q2 2025: Is there a case for gold in portfolios?

27 June 2025

The Global Investment Committee, in its June meeting, added a position in gold to potentially hedge against deteriorating economic data and/or geopolitical risks. Find out why gold has been used as a store of value for thousands of years, and how it might add value in an investment portfolio.

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K-shaped frictions in equities and the Fed mandate

11 Aug 2025

A “K-shaped” macro justifies a concentrated market. Equity performance broadened somewhat in July, driven by short covering and a solid Q2 earnings season. Before the July jobs report last week, there was a growing consensus to own laggards like cyclicals and small cap, where cleaner positioning and a potentially more dovish Fed later this year could provide support. While short-term rallies in junkier and more economically sensitive stocks are certainly possible, we remain skeptical of these moves over the medium term. For leadership to durably broaden into cyclical shares, we will look for signs of an acceleration in economic growth. However, the hard and soft data we track continues to show modest deceleration (Figure 1). We remain positioned for tech stocks to outperform as AI investment has the potential to outshine more muted growth elsewhere in the economy.

How long will corporates prioritize market share over margins? Estimating tariff impact requires making assumptions around how costs will be shared between suppliers, corporate margins, and consumers. The way companies have handled margins in the past few months may not be the way they deal with them on a go-forward basis. For example, firms may have been willing to take a bit of a hit to margins but will plan to pass on more of the expense when tariffs are more settled. Consensus expectations are for S&P 500 gross margins to contract by about 1 percentage point in H2 ‘25 before recovering in early ’26 – though we typically take out-year estimates with a grain of salt. If firms make a more forceful effort to pass on tariffs later this year, inflation could remain sticky even as the labor market is cooling. Political pressure aside, this tension will make the Fed’s job a lot harder in 2026 and is a key reason why we aren’t rotating into rate sensitive equities just yet.
In addition to this pass-through question on inflation, fixed income investors are focusing on President Trump’s appointment of Council of Economic Advisors Chairman Stephen Miran for Fed Governor Kugler’s seat following her early resignation. The appointment is expected to be temporary (through the end of Kugler’s original term which ends in January), but once his tenure begins following confirmation, he will likely strongly support rate cuts. Futures markets currently price about a 90% chance of a rate cut in September, and while Trump’s pick only slightly increased those expectations, it does signal to us that for now the President will continue to exert significant pressure on the Fed to cut rates, as Miran has been quite vocal about tariffs being at most a “one-time” effect on goods inflation.
For now, Chairman Powell appears to be regarding sticky inflation data as a greater concern than a softening labor market and so is holding back on cutting rates. But prices may continue to tick up (as they did in the services ISM reading released earlier this week). In our view employment is frozen – limited hiring with few mass layoffs, so absent weaker inflation data we think rate cuts risk the Fed’s credibility around one branch of its dual mandate.
Currently the 10y yield is reflecting the “weaker labor market, sticky inflation” narrative, trading just slightly higher than its 3-year average yield of about 4.10% (Figure 2). We remain cautious on adding duration even though slower growth might soon lead a rate-cutting cycle because inflation has not moved durably lower. In addition to tariffs, immigration, and fiscal deficit risks to inflation upside, bond investors might also determine that the Fed may become overly dovish and accordingly could demand higher term premiums for longer-dated yields, pushing them higher. We are positioned for core income around a 5.5y duration to potentially benefit from rate cuts while possibly avoiding the meaningfully steeper yield curve.

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Big Tech triumphs, macro mixed

4 Aug 2025

This week was a reminder that the market is not the economy. Solid GDP data and signs of tariff-driven inflation supported the Federal Reserve decision to hold policy rates steady. However, a softer July employment report – and downward revisions to prior months –keeps the door open for a potential rate cut in September.

Even as macroeconomic worries linger, we have been encouraged by the continued dominance of Tech earnings – particularly in AI and cloud. Across all major Tech reports, management emphasized continued – and often accelerating – investment in AI and infrastructure. But the sector and adjacent companies are well-owned, and valuations look full – leading to mixed price reactions to very strong results and outsized weakness after Friday’s labor data.
Looking ahead, we view newly announced tariffs as a headwind to further equity upside. We are closely monitoring any signs of margin pressure and shifts in corporate investment guidance. With more trade frameworks announced (e.g. EU) and broad tariffs now taking effect on August 7^th, we are moving to a new phase of policy and trade uncertainty centered around the impacts of the >15% effective tariff rate on corporate margins and consumer prices – all against a backdrop of legal challenges to IEEPA tariffs this fall.
We continue to favor large-caps and secular growth themes in both the US and international markets. Citi’s Chief Investment Office left its tactical asset allocation unchanged at its July meeting(opens in a new tab), and we maintained our neutral equity stance and short duration bias amid these crosscurrents.
Europe moves past peak tariff uncertainty with deal framework – but few details. Last weekend, European Commission President von der Leyen and US President Trump agreed to a 15% tariff ceiling for European goods imported into the US. This framework eased investor angst by avoiding the speculated risk of 30% tariffs on 1 August alongside European Union retaliation. In the absence of a joint statement or the text of a deal, investors will have to wait for more details including how the agreement to purchase $750bn of energy and $600bn of new investments in the US might be implemented.
Now past peak tariff uncertainty for the region, we continue to recommend a modest overweight to European large caps, which we believe may benefit from low rates and ongoing fiscal policy support. That said, even the lower tariff rate than feared creates a meaningful headwind for the EU around growth and exports as 24% of European large cap revenue stems from the US, and large fiscal stimulus packages are a rare commodity in the EU.
The AI arms race continues to propel stocks to new highs. As we highlighted ahead of earnings season, companies had a low earnings growth bar to clear for Q2. So far, roughly 83% of reporters have exceeded consensus earnings estimates. Both sales and earnings surprises are running above 2-year averages, while revisions to forward guidance are also north of long-run averages after reaching cycle lows in Q1. Cloud hyper-scalers notably remained focused on the race for market share and supremacy in AI during 2Q reporting, diverting historic levels of operating cash flow to fund investment.
For now, investors are willing to accept higher AI-related capex guides and ignore questions of investment ROI through 2026 – a trend we see as durable as companies focus on mission-critical AI investment. Outside of Technology, markets have been more discerning and punishing of misses. Excluding Tech and Comm Svs, stocks beating EPS have only outperformed by 0.8% on the day after reporting, while misses have been punished with 3.3% underperformance on average.
On tariffs, commentary remains mixed between companies that either have pricing power or diversified supply and distribution channels to manage the changing costs, and those that do not. We would note that the recent tax bill has positively impacted expectations for cash flow in some benefiting sectors like Industrials, which has offset some of the commentary on tariff-related concerns that will only grow in the coming months. In a slowing economic growth environment, we reiterate our focus on areas of the market where growth is likely to persist despite cyclical uncertainty – AI infrastructure – highlighted by this earnings season so far.
Federal Reserve on hold for now amid mixed economic data with growing signs of tariff inflation. The FOMC voted to keep rates at 4.5% on Wednesday with two voters dissenting. While atypical to see dissents, they came as expected given that both Governors Waller and Bowman had vociferously argued recently for immediate rate cuts. In the press conference, Chair Powell firmly stated that the Fed must remain vigilant as they are starting to see incipient signs of tariff inflation in data and market pricing. However, the weaker NFP report on Friday confirms that the jobs market is softening with a slight uptick in the unemployment rate. We see this opening the door for rate cuts at the next meeting in September, in line with futures jumping to price a more than 70% chance post-payrolls report.
While we remain focused on short-to-intermediate average duration for core income portfolios as rates trade at the lower end of recent ranges, we are evaluating diverging growth and inflation dynamics globally to determine when and where it is appropriate to add back to duration for income and ballast potential in the portfolio. A weaker growth environment with rising inflation in the US will likely keep rates range-bound from here.

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Policy uncertainty balanced against consumer resilience

29 July 2025

Here are a few key observations we made for this month:

Macroeconomics
Tariff and geopolitical uncertainty will drive a slowdown in corporate capex and hiring plans, resulting in a 2H25 economic and earnings slowdown. Fed and Fiscal policy are at odds with each other, but the Fed has room to cut if growth deteriorates

Equities
“Growth as defense” within US provides exposure to secular themes like AI. Europe and China should benefit from investor flows to diversify outside of US. A neutral overall position within equities is maintained given balance of risks to both up and downsides.
Fixed Income
There is inflation, a lack of fiscal discipline, and less investor confidence in US assets driving instability in US duration as a hedge. Global rates pressured higher keeps a short-duration bias. Credit spreads are tight, we maintain an up-in-quality bias.
Commodities/FX
Weakening USD provides opportunities in commodities, specifically gold, as a hedge and return driver. Global markets benefit from a weaker USD and increases a need for global diversification.

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Earnings Defy Policy Pressures

21 July 2025

Key takeaways: Mostly benign inflation data and solid bank earnings supports our view that the US economy is in good health, despite the sentiment overhang from tariffs and policy shifts. We continue to believe that the data does not argue for the Fed to ease policy rates this summer – even as the White House has increased its criticism of current Fed policy. With US equity markets hovering around all-time highs, investor reception to a very solid start to 2Q reporting season has been somewhat muted – reflecting already strong positioning. As the bulk of companies report over the next two weeks, we will be focused on any signs of tariff-related margin pressure and changes in investment guidance. We maintain our strong preference for large-caps and secular growth themes.

Good news: inflation data shows only subtle hints of tariff pressure. While headline CPI in June (2.7%) was close to expectations, the underlying data reveal a more nuanced and emerging inflationary pulse. The breakdown of core CPI (ex-food and energy prices) affirmed a continued disinflation in housing-related costs, yet goods prices were firm and broke a multi-year flat or falling price trend. We noticed the sharpest rise in prices centered in specialized goods areas where substitutes are limited, such as window and floor coverings, which increased by 4% in June (vs. just 2% for appliances). In contrast, recent corporate commentary indicates that larger multinational companies with diverse supply chains and revenue segments have the ability to build inventory and get creative in sourcing, softening the price pass-through to consumers in goods. Taken together, we see the impact of tariffs as uneven across and within industries, as companies with diverse supply chains will have more flexibility in managing costs than those operating with fewer product sources. It will ultimately take time to measure the shared impact on margins and consumers, with this earnings season as a key checkpoint. Beyond the raw data, we are monitoring consumer inflation expectations surveys for the psychological pass-through of initial tariff pressures into consumer behavior.
More good news: Bank earnings reflected a resilient economy in 2Q. So far, bellwether bank earnings have curbed concern about an imminent economic slowdown. However, tepid price reactions to solid beats suggest already-stretched positioning among the largest Financials. While all 17 Financials names reporting through Thursday beat consensus EPS estimates, only 7 outperformed in the session after releasing results. We view diversified banks as beneficiaries in a higher-rate, more volatile environment, but valuations near post-GFC highs and crowded ownership are headwinds for top bank outperformance. In positive signs for the health of the consumer and deal activity, net loans deemed uncollectible (charge-offs) were below expectations while major investment banks highlighted growing M&A activity. If financial conditions remain loose with range-bound rates and strong equity prices, we see this as a good sign that the nascent recovery in M&A can continue as focus turns to deregulation. Overall, earnings season initially points to a benign economic environment in 2Q, supporting the recent recovery in lagging sectors and small companies that are also popular shorts. However, we are hesitant to add broadly to risk at current stretched valuations with effective tariff rates slowly climbing towards the new August 1st trade deadline.
Volatility news: political pressure on Fed continued to escalate. White House sources stated that Trump was ready to fire Fed Chair Powell this week, and the market reaction was immediately negative: the USD index fell almost 1%, 30y Treasury yields spiked 5-6bps, and gold jumped almost 1.5%. We view the independence of the Fed as critical to a stable economy. President Trump read the market reaction and walked back the threat within two hours. We see two key implications from this escalation: 1) political pressure to subvert Fed independence will likely continue until Chair Powell’s term ends in May 2026; and, 2) the President will demand the next Chair nominee share his bias towards lowering policy rates. Importantly, however, the decision to lower policy rates is a committee vote, and the Chair holds limited sway on where votes land. We see the FOMC remaining steadfast in their data dependence regardless of the Chair and maintaining current policy rates through 3Q, until either a significant deterioration in labor market data or further disinflation. With political pressure on the Fed mounting and shifting investor preferences away from US Treasuries pressuring yields higher, we continue to prefer a short-to-intermediate duration exposure for core fixed income portfolios of 3-5 years.

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Earnings battle tariffs for investor focus

14 July 2025

Markets have brushed aside President Trump’s renewed tariff threats: Bolstered by the recent passing of the tax bill, President Trump re-engaged his trade war this week following the 90-day pause. The targeted letters sent to countries representing 34% of US imports held an average headline tariff rate of 30%, which would bring the average effective US tariff rate from 3% in January up to ~20%, if held.

While negotiations with other large trading partners like Europe, Mexico, and China are still ongoing until the new August 1st deadline, investors are no longer discounting a dramatic rise in tariff rates as in April. We believe markets underestimate the likelihood and magnitude of these tariffs being enacted – and the impact on corporate margins and prices. As we’ve stated before, while the market may be past peak tariff shock, we are still a long way from peak tariff impact. While short-term factors like seasonality, market momentum, and a low bar for earnings have kept risk sentiment afloat, we maintain a neutral equities stance in core portfolios recognizing that current market levels insufficiently account for downside risks. With implied volatility still relatively low, tactical hedging may also make sense as a risk management tool for qualified clients.
“OBBBA” bill provides (eventual) potential upside to capex: Several provisions in the tax legislation should provide a boost to US investment over the medium-term. The combined dynamic of tariff pressure and incentives like permanent full expensing of equipment, R&D, and factory building may lead to onshoring of industrial production in the coming years. That said, the permanence of these provisions limits the need for expediency in businesses initiating new projects. In the near-term, we remain skeptical of an increase in earnings expectations on the back of this bill as companies must navigate larger macro issues, such as restrictive monetary policy and tariff whiplash. These factors may neutralize some of this pro-business domestic policy, particularly for projects that require leverage or imported materials, despite the market positive signaling and reaching new all-time highs.
At the sector level, we see cross-cutting impacts from OBBBA. Among beneficiaries, US defense contractors will see another $150bn in incremental Pentagon funding, focused on bolstering missile defense, artillery, and shipbuilding capacity. Citi Research1 estimates that permanent depreciation alone boosts US Telecom fair value by 7%. Secondary beneficiaries from higher American capex also include machinery and industrial robotics names, but it may take several quarters for a pickup in new orders to materialize. We will be tracking new capex announcements during 2Q earnings season, with a particular eye on the time horizon for said investments.
Not all sectors were winners from the OBBBA, as clean energy and EV firms lose significant IRA subsidies beginning September 30th. Cuts to social programs like food assistance and Medicaid are broadly negative for staples food producers and smaller health care providers, respectively.
While we see the potential to invest thematically for a rise in capex in 2026, our portfolios currently remain anchored to areas of the market where investments are already underway, particularly AI infrastructure.
Banks will set the tone for 2Q earnings next week: Equity investor focus will turn to 2Q earnings season next week, with 23 S&P 500 Financials names reporting and establishing the groundwork for the quarter. US banks have rallied nearly 10% since mid-June, boosted by successful 2025 stress tests that foreshadow higher payouts to shareholders in the year ahead. Big banks should deliver another strong quarter for trading revenues amid a rollercoaster for markets, while somewhat reduced macro uncertainty and improving loan growth bodes well for net interest income. The outlook for dealmaking activity in 2H will be a key point of focus among analysts, with important knock-on effects for asset managers who have lagged the banks so far year-to-date.
2Q results come at a critical moment as bank valuations approach post-GFC highs. US Banks currently trade at 1.6x book value, the 99th percentile since 2010, though there remains significant dispersion within the sector. Bank bulls would argue that this time is truly different, with regulatory tailwinds, yield curve normalization, and an uptick in M&A activity justifying structurally higher multiples. Importantly for global portfolios, Financials have been a key component of momentum trades leading the market higher since April. With momentum taking a bit of a pause as laggards catch up, next week’s earnings will be a key as we assess market internals.

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US tax bill fireworks for July 4th

7 July 2025

Passage of US tax bill would be net positive for risk: As we await a final House vote today that will likely ensure passage of the One Big Beautiful Bill Act (“OBBBA”) by President Trump’s Independence Day deadline, investor optimism for pro-growth fiscal policy from the new US tax bill has likely helped contribute to a 25% gain in US equities off the April lows. This legislation not only extends existing tax rates that were lowered in 2017, but also contains numerous new federal revenue cuts including allowing upfront deduction of capital expenditures and R&D.

For foreign investors, importantly, the Section 899 “revenge tax” has been removed. While there are reductions in spending included as moderate offsets to tax cuts, legislation will likely add to the deficit over time. Passage of the bill increases confidence and clarity for markets and is a stimulative catalyst for growth as corporations are historically adept at incorporating legislative changes into operating plans. For our investment allocation, we are reviewing our optimal level of equity exposure in light of the rally and maintaining our underweight duration bias in fixed income.
Lack of trade progress still weighs on corporate optimism: Tariffs will again be in focus after we move past the tax bill, as the chance of final resolution with all major trading partners by the July 9th deadline is low. The trade deal announced with Vietnam (20% tariff and 40% on any trans-shipments) is an encouraging step. However, some mix of producers, exporters, and consumers will have to absorb the higher costs on the country’s 4% share of US imports and nearly half of the US footwear imports. Further corporate margin expansion from here will be challenged if similar deals are struck with other countries, raising broad tariff rates above 10%. We already see an unfolding paralysis in future plans for hiring & firing on management uncertainty. Concerningly, nearly half of the CEOs polled in the latest Business Roundtable survey anticipate declining employment, lower capital expenditures, and reduced sales between now and the end of the year. This supports our view of management teams resisting large-scale spending and hiring plans for now, outside their business-critical capex plans in areas like AI. We remain more constructive on large US companies’ ability to navigate this environment over small cap companies, and we prefer to tilt our exposure towards growth-oriented firms that are learning to scale and evolve with less reliance on human capital through AI in the face of immigration-starved labor supply.
Employment data supports current Fed policy as market prices cuts: Yields across the curve have dropped recently due to the perception that the Fed may lower rates sooner than previously expected on weakening hard data and political pressure from the White House. However, today’s strong employment report alleviates near-term concern of a stagflationary environment with limited signs of tariff impact on real activity at this point, supporting the Fed’s on-hold stance. If Powell’s expectation of tariff inflation is not realized by late summer, we see the opening for a rate cut rate closer to year-end with additional cuts likely in 2026. Longer-term yields are largely tracking expectations for these rate cuts as well as a more benign outlook for inflation. As a result, investors are pricing out some of the term premium (additional yield required for longer-dated bonds) in yields for now, despite a higher expected deficit from the likely passage of the US budget bill. The tax bill, resilient labor market, and potential for tariff inflation support our underweight duration bias for now, but further deterioration in hard data and more dovish Fed rhetoric will be a catalyst for us to move closer to benchmark exposure.
Resilient earnings set up potential for 2Q beats: Despite cautious sentiment among business leaders, we see the upcoming earnings season as reflective of a still solid economy in 2Q. Consensus EPS for S&P 500 at 2.2% y/y may be a low bar to beat, with only four sectors (communication services, healthcare, tech and utilities) penciled in for positive y/y growth. Meanwhile, negative preannouncements are fading, and earnings revisions are on the upswing. Among ~120 companies that have preannounced Q2 guidance, negative preannouncements are running at a significantly slower pace than we saw in 1Q25 and 2Q24, suggesting management teams are comfortable with consensus estimates. Meanwhile, we’ve seen accelerated upward revisions to earnings with the ratio of upgrades to downgrades over the last month (1.23) above the long-term average (0.8). The fundamental backdrop for equities remains resilient to date, but our focus this reporting season will be on management commentary for navigating the next twelve months –which will look distinctly different than the last twelve.

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Tired of tariff tantrums, market shifts focus to earnings

Markets choppy on mixed signals

30 June 2025

Stocks punched through all-time highs on Friday morning after the US and China confirmed that both sides signed a trade framework this week, but later in the day gave back gains after President Trump indicated he was halting trade negotiations with Canada. On Capitol Hill, the Senate is working through several key snags to the President’s signature legislation but still hopes to vote on a bill this weekend. The infamous “Section 899” targeting foreign investment was removed from the bill, a relief for many global investors.

The Fed is divided over the timing of rate cuts. Post-FOMC meeting last week, Treasury yields have shifted lower due to weaker economic data and minimal evidence that tariffs are thus far affecting aggregate inflation data to the degree previously feared. This has set up a public schism within the Fed on when to cut rates, with two Trump-appointed Fed governors arguing for a July cut. However, Chair Powell reiterated during his congressional testimony that the Fed will remain on hold until they can better determine tariff impacts on inflation. Regardless of exactly when the Fed cuts over the next 18 months, investors may be viewing this public debate as a signal that the Fed may have a much more dovish Chair starting in mid-2026. We would expect that if tariff inflation does not materialize during the summer, the Fed will recommence a cutting cycle no later than September, which will propel intermediate duration bond prices beyond this year’s gains. But investor concerns over the new US budget bill’s impact on the fiscal deficit, combined with increased Treasury issuance this fall after the debt ceiling is increased, may prevent longer-term yields from moving significantly lower absent a marked economic slowdown.

We’re wary of equity market complacency. While geopolitical risks led to short-lived spikes in volatility, the underlying trend for equities remains positive due to 1) resilient corporate fundamentals rooted in AI optimism, and 2) a stable labor market supporting consumption. Our latest readings on earnings preannouncements, guidance, and revisions suggest that management teams are not as cautious heading into 2Q reporting season as they were in 1Q. While uncertainty and anxiety feel much lower than the start of the quarter (following the initial tariff shock), we still believe that the range of outcomes on earnings is very wide in 2025. During earnings season, we will be particularly focused on management commentary on capital expenditure and hiring plans. Overall, we remain neutral on equities with a strong bias towards large caps. We believe markets are not priced for evolving tariff and geopolitical risks or worsening economic data, but we view US large caps as the best house on block.

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Resilience ahead of a hot summer

24 June 2025

The US struck Iranian nuclear facilities over the weekend, risking escalation of the conflict between Israel and Iran. Brent Crude briefly surged to over $81 a barrel in early Asian trading before settling this morning to nearly unchanged from Friday’s close at around $77. US equity and fixed income markets have had similarly muted reactions so far. The key variable for markets going forward is Tehran’s next move. Markets will likely react more forcefully if Iran’s retaliation is viewed by the US as escalatory or if it risks global access to Gulf oil supplies.

US Treasury yields opened this morning only slightly lower than Friday, despite these developments in the Middle East, weaker US retail and housing data, and the June FOMC meeting announcement last Wednesday (please see our Fixed Income Investment Strategy(opens in a new tab) for more). The Fed’s “dot plot” left expectations unchanged for two rate cuts this year, but removed one rate cut in 2026, signaling continuation of a “higher for longer” stance. Additionally, the committee forecasts inflation moving higher to 3.1% by year-end due to tariff impacts, too high for the Fed to cut more aggressively until it has more definitive data. The market appears to still be demanding a high level of term premium in longer-dated bonds to compensate for this policy uncertainty. Accordingly, we remain paused on adding additional duration to portfolios.
We added gold to portfolios earlier this month as a risk hedge in a world of positive stock-bond correlations. In particular, we see gold as well-positioned to provide positive returns if either economic data deteriorates further and/or geopolitical risks rise from here. Of course, de-escalation of Middle East tensions or continued hard data resilience could dampen gold returns, but we’d expect equities to rally in these scenarios. Ultimately, we view our gold position not simply as an isolated speculative bet, but as a diversifier in multi-asset portfolios to supplement the traditional role of longer duration Treasuries.
Global equities remain resilient despite persistent headline risk. Markets await Trump’s decision on Israel-Iran, potential trade deals (or not) ahead of the July 9 deadline, Q2 earnings season kicking off in mid-July, sector-level tariffs, and continued negotiation of Trump’s signature legislation in Congress. We can rationalize a relatively sanguine equity tape by looking at underlying leadership, with AI-led growth stocks outperforming defensives and cyclicals since April 1. If stocks can climb the summer wall of worry, we wouldn’t be surprised to see indices reach new all-time highs. But our neutral equity positioning is an acknowledgement that markets likely aren’t priced for worse-than-expected economic, trade policy, and geopolitical outcomes.

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Gold shines after Israel attacks Iran

16 June 2025

On oil: This escalation of conflict is a departure from the flare-ups last April and October, which were signaled in advance. While we are concerned that this phase may be the beginning of a sustained conflict in the region, market pricing of geopolitical risk has historically been short-lived. However, if oil flows are significantly and sustainably disrupted, the global impact could be meaningful. Over the past 50 years, the Brent crude oil price has surged nearly 5% in the five trading days following geopolitical events in oil-sensitive regions, but these moves typically reverse in a matter of weeks. Today, OPEC+ has close to 4 million barrels per day of spare capacity – mostly in Saudi hands – which could theoretically offset a drop in Iranian supply. But the real risk is the closing of the Strait of Hormuz, a chokepoint which roughly 20 million barrels – or 20% of global oil consumption – passes through daily. Although not our base case, any interruption in oil transportation through the Strait would trigger a major shock to both markets and supply chains.

Bond implications: US Treasury bond yields and the US dollar remained anchored on the news, defying their traditional role of rallying sharply as “safe haven” assets. These muted reactions confirm investor hesitancy to rely on historic asset correlations to hedge portfolios. To us, longer-term bonds appear reluctant to break meaningfully below these short-term yield levels despite favorable May inflation data released this week, successful refinancing auctions of both the 10y and 30y, and presumably some “flight-to-safety" buyers due to this new Middle East conflict. The combination of tariff-driven price increases keeping inflation firm, and the likely deficit-enhancing US budget bill will require investors to demand additional levels of income for holding longer-dated bonds or increasing the “term premium.” As a result, we see rates as upwardly biased, and we remain on pause in adding additional duration to portfolios despite the recent rally in rates.
On gold: One beneficiary of “safe haven” demand is gold, which initially jumped 2% on the news, continuing its rally over the past month and about 2% from the all-time high (our Global Investment Committee recommended adding gold to core asset allocation portfolios last week). The jump in gold without a corresponding increase in Treasury prices is very unusual and is one more signal that there is a shift towards gold as a primary reserve asset. Indeed, this week the ECB reported that as of the end of 2024, gold had moved into second place in total global central bank reserve assets (ahead of Euro-denominated assets), with gold constituting about 20% of total reserves.
On equities and tariffs: Global equities are lower since Thursday evening, but the selloff has initially been relatively mild. Assuming the Israel-Iran conflict doesn’t spiral into a wider regional war, we expect equity investors will soon refocus back on trade and underlying US economic health. Lackluster equity performance following this week’s constructive talks between the US and China are a signal to us that new trade deals may be losing their potency as drivers of new rallies. We are also wary that sector tariffs could be announced at any point. Escalation of hostilities in the Middle East on top of tariff uncertainty keeps us on the sidelines from adding to risk at these market levels. We prefer to maintain our neutral positioning across global equities.

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Data resilience despite policy instability

09 June 2025

Recent labor market indicators point to a cooling, but not collapsing, job market. While the number of jobs added and the unemployment rate were largely unchanged in May, 200k individuals have left the workforce since January. After heavy discussion earlier in the year around federal government job cuts, economists have shifted focus to a growing number of private sector layoff announcements, including those from major employers like UPS, Microsoft, Walmart, Starbucks, and Chevron. So far, these anecdotes have yet to show up in hard data. We view the near-term benign labor market and temporarily stable inflation as favorable for an on-hold Federal Reserve, keeping policy rates elevated and supportive of our short-duration tilt in fixed income.

As we discussed in last week’s CIO Bulletin(opens in a new tab), the current US tax bill now under Senate review will likely have implications for the persistence of the US fiscal deficit, and in turn may contribute to higher US Treasury yields. Recently, the market has newly focused on an obscure set of potential new rules in the House version of the bill called “Section 899.” This section concerns potential taxation of foreign-owned investments in the US. While it is likely the Senate will revise these provisions in the face of heavy lobbying, we view the potential inclusion of this language as disruptive to global asset allocators’ optimal exposures to US assets and would contribute to further USD weakness. We recently added to gold along with European and Chinese equities to diversify portfolios against a potential reduction in appetite for US assets over time.
With the S&P 500 index up over 20% from its April low and less than 3% from its all-time high, the market has largely priced out the potential future negative impact of recent tariff announcements. The recent US international trade court ruling against the use of IEEPA for tariffs encourages both market participants and trading partners to view end-state tariffs as far less severe in scope and scale than the market feared on April 2nd, even as reciprocal and sectoral tariffs may take many months to finalize. We believe corporate management teams will delay large capex (ex-AI) and hiring plans until further clarity on trade rules, leading to slower economic growth and shallower EPS gains in 2H25. As such, we remain neutral on aggregate equity exposure and are holding off on adding to risk in the near-term. Our exposures remain biased towards high quality, secular growth (like AI) which we expect will outperform trade-sensitive cyclicals.
Portfolio considerations: The Citi Wealth Global Investment Committee met this week and made several adjustments to improve portfolio quality and diversification (please see our June Asset Allocation(opens in a new tab)).

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US lowers tariffs on Japanese goods but political uncertainty hits the Yen

31 July 2025

US President Trump's decision to reduce Japan's reciprocal tariffs from 25% to 15% on Japanese goods failed to reduce political and fiscal uncertainty in Japan which means near term headwinds for the Yen remain. Our Head of FX Investment Strategy, Jaideep Tiwari, gives us an overview of the economic developments in Japan, and discovers reasons for the Yen to strengthen in the medium- to long-term.

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25% tariff on Japan a short-term setback for Yen bulls

18 July 2025

A 25% tariff on Japanese exports would raise short-term economic and political costs for Japan. This likely pulls back optimism and sets the Yen back. Our Head of Global FX Strategy, Jaideep Tiwari, explores the impact of President Trump's pronouncement post the end of the tariff pause for the JPY.

Read more in your Citi Mobile® App’s Digital Library*(opens in a new tab).

CHF – A Funding Currency Or A Safe Haven?

JPY – Still on a path of further gradual appreciation

5 July 2025

The Yen continues to strengthen against USD as the Bank of Japan (BoJ) signals a more hawkish stance to deal with upside risks to Japan’s inflation. Our Head of FX Investment Strategy, Jaideep Tiwari, uncovers the mechanics at play for JPY appreciation.

Read more in your Citi Mobile® App’s Digital Library*(opens in a new tab).

AUD – Stars aligning for a brighter future

19 June 2025

Even before the global trade war, Australia’s domestic outlook was already weak with its GDP data showing weaker-than-consensus real activity growth. However, the stars seem to be aligning for the Aussie as the USD faces headwinds, and that RMB, being highly correlated with AUD is favorably positioned to benefit from de-escalations in US – China trade tensions.

Read more in your Citi Mobile® App’s Digital Library*(opens in a new tab).

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