Murky US policy continues to drive investor | Australian Markets

The persistent lack of readability round US policy has continued to fuel market volatility and investor uncertainty with the implications on US equities remaining “front and centre”, in accordance to new market commentary from AXA Investment Managers (AXA IM).

Chris Iggo, Chief Investment Officer, Core Investments at AXA IM, stated traders are ready for clear direction on US policy developments earlier than deciding their subsequent investment strikes.

“In the case of adverse outcomes, US assets remain most at risk, given the threats to growth, inflation and interest rates,” he stated.

“Markets replicate this with US equities and long-duration bonds underperforming in 2025. Over the summer season there could possibly be more policy readability. Investors ought to be ready for a significant stage of import tariffs and a finances that underscores medium-term fiscal sustainability dangers. In fixed income, short-duration methods have endured much less drawdown and delivered constructive year-to-date returns.

“Resilient fundamentals should help sustain credit assets’ performance with limited interest rate risk. Being at the centre of the trade war; US and greater China equity indices have performed poorly. Few countries are exempt from trade risks but equity markets with the lowest valuation multiples should fare better as uncertainty persists. The UK, Canada, Australia and Eurozone have the lowest drawdown risks given current valuations.”

This comes because the European Central Bank (ECB) has entered territory that makes it well-positioned to react to the market implications of trade dangers, as opposed to the US Federal Reserve’s (US Fed) present policy place.

“The pandemic reminded us that monetary policy is not well equipped to face economic asymmetries. For decades, the standard model has somewhat dodged the supply side issues in the economy, prioritising demand stabilisation instead,” Iggo stated.

“While the European Central Bank’s (ECB) Strategy Review will supposedly handle this key problem, responses could range. The Federal Reserve (Fed) is confronted with a US trade policy uneven shock, though the consensus was already anticipating larger inflation and slower US GDP growth even earlier than Liberation Day.

“In distinction, the ECB is going through a symmetric shock, i.e. barely decrease growth and inflation, which is definitely manageable with normal instruments. Therefore, the Fed’s response ought to differ from the ECB’s, no less than in concept: Fed policymakers ought to rigorously weigh prices and advantages of concentrating on price stability slightly than full employment and vice versa.

“Against this background, markets believe that both the Fed and the ECB are likely to continue cutting rates during 2025.”

Iggo additionally famous considerations over “foreign investment in US dollar credit”, as “the deflation of US exceptionalism narrative and the substantial appreciation of Taiwan’s dollar” mix forces.

“A flood in US dollar supply, alongside limited demand drove the move, as investors returned to home equity markets and exporters repatriated deposits. Data shows that historically there has been no structural relationship between the US dollar and foreign investors holdings of US corporate bonds,” he stated.

“Instead, different components play an important position in driving overseas demand, comparable to international financial savings provide and restricted competing home investment alternate options. For Asian traders, difficult overseas exchange (FX) hedging prices are usually not new, nonetheless US greenback credit purchases from life insurers may ease in the event that they’re confronted with headwinds to promote US dollar-denominated insurance policies.

“Increasingly so if local investors think the dollar is overvalued, and more losses could be ahead. Equally, an FX hit to earnings could constrain insurers’ ability to continue to deploy capital into US dollar credit.”