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Six shifting fault lines behind market resilience

Markets are scaling new highs, even as bond yields rise and geopolitical tensions simmer. But beneath the surface, global power dynamics and monetary policy paths are quietly being redrawn.

The Allocatr Editorial Team

Despite political theatrics and rising bond yields, equity markets continue to climb. But beneath the surface, a quiet reordering is underway—from central bank messaging to China trade diplomacy, from wage inflation to the slow bleed of German industrial might. Here are the six most important developments shaping the economic backdrop this week.

Markets keep climbing, but the air is getting thinner

It’s a strange kind of optimism gripping equity markets. The MSCI World Index closed at an all-time high last Friday, brushing aside a sharp 11 basis point rise in the US 10-year Treasury yield to 4.51%. The S&P 500 and Nasdaq each added over 1% on the day, buoyed by another round of optimism over US-China trade diplomacy and fading fears of an economic hard stop.

That optimism is fending off noise, from Donald Trump’s calls for a full percentage point rate cut, to his not-so-veiled hints at replacing Jerome Powell at the Fed. Even Friday’s blowout with Elon Musk—a theatrical feud that included calls for impeachment and resurfaced Epstein rumours—did little to shake investor confidence. Asian markets followed suit on Monday, with Nikkei and Hang Seng posting gains. For now, the mood remains risk-on. But it’s a rally running uphill, with more than a little fog on the trail.

The Fed may pause, but the job market isn’t falling apart

Friday’s jobs report did little to resolve the inflation-versus-growth debate. The US added 139,000 jobs in May, down from a revised 147,000 in April. Wage growth came in at 3.9% and unemployment held at 4.2%. Soft, but not alarming. The Atlanta Fed’s spider chart of 16 labour indicators shows a weakening or flat trend across the board compared to a year ago.

That gives the Fed cover to keep rates where they are for now. Markets are pricing in around 40 to 45 basis points of cuts by year-end—far less than Trump’s rocket-fuel demand. The question is whether this gradual softening represents a benign cooling or something more fragile. So far, no cracks. Just slower heat.

US-China talks resume, rare earths and trade war anxieties return

Washington and Beijing are back at the table. A high-level meeting in London this week follows a 90-minute call between Xi Jinping and Donald Trump, which reportedly led to a breakthrough on Chinese rare earth exports. With the current trade détente set to expire 12 August, stakes are rising fast.

The US is pushing for concrete commitments on export licences amid growing alarm from the auto industry over magnet shortages. Meanwhile, China is bristling at US tech export controls. Both sides are trying to avoid escalation, but the window is closing. Notably, China also pledged to accelerate rare earth shipments to the EU over the weekend—a subtle play in the wider geopolitical chessboard.

Europe’s central banks shift tone as inflation moderates

Last week’s 25 basis point cut from the ECB may have been the last in this cycle. The deposit rate now sits at 2%, and even the bloc’s dovish policymakers are signalling a halt. Greece’s Stournaras called the bar for further easing “high.” Croatia’s Vujcic was more blunt: “We’re nearly done.”

President Lagarde claimed the ECB is now in a “well-calibrated” position to hit its inflation targets. But hawks like Isabel Schnabel warn that rising trade tensions could inject fresh inflation through supply shocks—especially if US tariffs proliferate. Deutsche Bank sees rates rising back toward 2.5–2.75% by 2028 as fiscal policy, particularly on defence and infrastructure, plays a larger role.

The UK outlook may be better than it looks—if you ignore the PMIs

The Bank of England is facing criticism for potentially underestimating the resilience of the UK economy. Governor Andrew Bailey has leaned on recent PMI softness, but critics argue the measure skews sentiment-heavy and misses key parts of the economy like retail and government activity.

Data from Incomes Data Research showed median private sector pay up 3.4% in April, with 11% of employers offering raises above 6%, reflecting the national minimum wage hike. The BoE expects wage growth to moderate toward 3% over the next year—consistent with inflation goals—but recent stickiness keeps rate-cutters cautious. Policymaker Megan Greene noted the economy has barely grown in nine months, though she expects consumption to pick up soon.

Germany’s growth hopes fade as trade tension weighs

The Bundesbank’s latest forecasts delivered a sobering verdict: stagnation in 2025, followed by a meagre 0.7% growth in 2026. That’s below estimates from both Berlin and Brussels. The blame lies squarely with US tariffs, which are exacerbating Germany’s structural challenges: high energy prices, weak industrial competitiveness, and faltering demand for EVs.

Bundesbank President Joachim Nagel pointed to defence and infrastructure spending plans from CDU leader Friedrich Merz as a potential catalyst—though effects won’t materialise before 2027. The silver lining? Nagel believes Germany’s public finances can handle a temporary rise in deficits to support the transition. Still, the German industrial model remains under acute pressure.

Markets may be ignoring Trump’s antics, Musk’s tantrums, and rising yields—for now. But beneath the surface, power is shifting. Central banks are nearing the end of their easing cycles. Labour markets are softening without collapsing. And trade politics are re-emerging as the key macro variable to watch, especially for Europe. Investors aren’t running for cover yet, but they’re watching the clouds.

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Markets are grasping for clarity but getting contradictions instead. Softer US inflation, fragile trade truces, and geopolitical flashpoints are pulling capital in every direction at once.

Markets tiptoe on soft CPI and shaky diplomacy as oil and gold defy logic

Fresh inflation data from the US offered a brief reprieve, but investors aren’t exhaling just yet. From simmering US-China trade tensions to oil’s geopolitical bid and Europe’s equity revival, the global picture is anything but settled. Underneath the headlines, real risks linger, and the capital is already shifting.

Uneasy calm in trade as China and US inch forward

The apparent breakthrough between China and the US in London did little to steady markets. Yes, there’s a framework. No, there’s no peace. The so-called Geneva truce remains fragile, and the absence of detail only reinforces that uncertainty. Scott Bessent, Treasury’s voice of caution, was blunt: this will drag on. Export controls remain the key sticking point, with China imposing a six-month cap on rare-earth export licenses and the US threatening to reinstate restrictions if promises are broken. The market, rightly, is still pricing in risk.

Compounding the tension, Trump once again rattled the sabre, promising to unilaterally enforce US trade terms if deals aren’t struck within the next two weeks. The EU doesn’t share that urgency. Officials in Brussels expect talks to stretch beyond July, with only a vague deal-in-principle possible by then.

Meanwhile, capital flows tell their own story. In May alone, European equity funds pulled in $21 billion, bringing year-to-date inflows to $82.5 billion—the strongest showing in four years. US equity funds, by contrast, bled $24.7 billion, the worst month in a year. The rotation is not just about relative valuations—though Europe’s P/E at 13.5 looks modest beside the US’s 20.4—but about a broader reallocation of risk, driven by weakening dollar, unstable trade policy, and surging US deficits.

Inflation relief, bond bid, and gold’s stubborn rise

The May US CPI print surprised slightly to the downside at 0.1% month-on-month, against expectations of 0.2%. Year-on-year inflation stands at 2.4%. That marginal softness was enough to send yields and the dollar lower. The US 10-year slipped a basis point to 4.40%, and the CME FedWatch now prices in one to two rate cuts before year-end.

Yet despite this, gold moved higher. Not dramatically, but enough to confuse. The metal, often a hedge against inflation or geopolitical chaos, is climbing even as inflation softens. One reason: escalating supply risks. Barrick Mining has removed its Malian production from its 2025 guidance following a long-running dispute with the country’s government. Loulo-Gounkoto, one of its largest African gold assets, has been frozen since January due to an export ban. A court ruling is expected Thursday. Uncertainty in physical supply adds to the tension in financial markets.

Meanwhile, oil rose sharply again, bouncing nearly 5% in the previous session. This time it’s geopolitics. Talks between the US and Iran remain unresolved, with military threats on both sides. Washington has ordered partial embassy evacuations in the region, and Israeli airstrikes are reportedly on the table. Add to that a draw in US crude inventories and rising refinery runs—up 228,000 barrels per day week-on-week—and you get a textbook setup for higher crude prices. But this rally is skating on thin ice. New production capacity is due to come online in the autumn, threatening to tip the market back into oversupply.

Equity markets follow oil, sentiment follows Tesla

Energy stocks led Wall Street on Wednesday. ExxonMobil, ConocoPhillips, EOG Resources and Diamondback all posted solid gains. Palantir rose 2.7%, Broadcom added 3.38%, Starbucks jumped 4.33%, GE Vernova climbed 3.9% and Philip Morris moved up 2.42%.

Tesla rose again, fuelled by a video of its autonomous vehicles cruising through Austin and reports that Musk’s spat with Trump had quieted. A fragile peace of sorts.

In Europe, the picture was darker. The STOXX 600 slipped 0.8%, the DAX dropped 1.3%, and the CAC 40 fell 0.8%. Even the FTSE 100 was marginally lower. UK GDP data disappointed, and RICS housing data showed prices at a ten-month low. France revised down both growth and inflation. In Asia, Taiwan tech names dragged markets down, while Japan’s Ministry of Finance survey showed deteriorating business sentiment. Industrial metals bucked the trend, rising across the board.

Even fashion was hit. Inditex, owner of Zara, missed Q1 sales forecasts, sending H&M down 2.5% in sympathy. The consumer remains fickle, especially in discretionary spending.

A market moving sideways, eyes on everything

The backdrop is clear: no single narrative dominates. Geopolitics are back. Inflation is easing, but the Fed isn’t moving yet. Trade remains a wild card. Supply constraints push commodities up, while equity rotations and sentiment shifts scramble the usual signals.

It’s a market gripped by divergence. And divergence, as ever, demands attention.

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As the ECB prepares its eighth rate cut, global capital starts pivoting toward Europe, even as tariffs loom.

Five signals Europe is back in favour

After a decade of trailing Wall Street, Europe’s equity markets are drawing renewed interest. Not because of a sudden surge in growth, but because the US now looks more politically erratic, economically inflated, and less investable to global institutions wary of trade wars and ballooning debt. In May, the Stoxx 600 logged its best month since 2005. Beneath that headline, five shifts in investor positioning, macro data and central bank policy suggest that Europe may be carving out a new role in global portfolios, not as the growth engine of the world, but as a credible hedge against American exceptionalism.

1. Big money is rotating into Europe

European equities are catching inflows not seen in nearly a year. Calastone data shows UK investors pulled £525 million from equity funds in May, but European funds bucked the trend, attracting £369 million in net inflows. In contrast, US-focused equity funds saw their second worst month since September 2023, with a mere £115 million in inflows. The shift is not driven by European euphoria. It’s driven by American disillusionment.

Large players like Apollo Global Management and BC Partners are backing the move. Deutsche Bank upgraded its Eurozone GDP forecast from 0.5% to 0.8%, citing resilience in the face of US tariffs averaging around 10%. Germany is forecast to move from 0.3% growth in 2025 to 2.0% by 2027 as fiscal stimulus begins to bite.

The narrative is slowly flipping. Where investors once saw structural stagnation in the Eurozone, they now see geopolitical insulation, central bank sanity, and room to surprise on the upside.

2. The ECB isn’t bluffing. It’s cutting, again

The ECB is expected to cut rates by 25 basis points today, taking the deposit rate to 2%. That will mark 200 basis points of cumulative easing — a significant swing given that core inflation is no longer threatening to spiral. There’s a growing view that the ECB might pause in July, especially as the US trade outlook remains in flux. But for now, the message is simple: Europe is easing deliberately, while the Fed stands frozen.

Sell-side consensus sees another cut in September, bringing rates to 1.75% and likely ending the cycle. But some expect one or two more reductions, depending on how much drag the latest tariff regime creates.

3. Macro data still noisy, but improving beneath the surface

Europe’s macro data remains choppy, but important signals are turning. German factory orders rose 0.6% month-on-month in April — below consensus, but still positive. The underlying details matter more: orders in electronics and optics jumped 21.5%, bolstered by large contracts. Orders in aircraft, ships, and military equipment rose 7.1%. While machinery and electrical equipment fell sharply, overall domestic orders rose 2.2%, underscoring a fragile but broadening recovery.

Elsewhere, Eurozone construction PMI disappointed, but Italian retail sales beat expectations. UK construction PMI showed contraction slowing. In Asia, Japan’s real wage growth remained negative, while China’s Caixin services PMI held steady. It’s an uneven picture, but European figures suggest momentum is building — especially when stripped of frontloaded activity ahead of tariffs.

4. Sector leadership is shifting, not just tech anymore

Europe’s top-performing sectors this week were not the usual suspects. Basic resources led gains, powered by Chinese export restrictions on rare earths — a reminder that industrial metals are as much about geopolitics as demand. Construction and materials surged, thanks to corporate moves: BALCO-SE signed a major steel balcony deal, KRX-IT expanded its US roofing investment to $1 billion, and HOLN-CH bought a Canadian precast firm. Even Holcim’s smart building push through a Dutch acquisition speaks to renewed confidence in industrial capital spending.

Healthcare also rallied, buoyed by news that FYB-DE’s biosimilar drug won Brazilian approval, and Goldman Sachs upgraded Bayer, citing litigation clarity and Pharma upside. Travel and leisure, by contrast, lagged, Wizz Air fell sharply despite strong earnings, pointing to FY26 uncertainty, while Norwegian Air and Finnair dipped on modest traffic growth.

5. Trade tensions are a headwind — but also a catalyst

The trade backdrop is deteriorating. The US has doubled tariffs on EU steel and aluminium to 50%, while the EU prepares countermeasures potentially targeting US maize, bourbon and even Boeing aircraft. The planned €21 billion retaliation package is on hold, for now.

Yet the same tensions that weigh on sentiment are fuelling Europe’s relative appeal. The EU’s firm stance contrasts with the unpredictability of US policy. A BoE survey found that just 12% of UK firms view US trade policy as a top uncertainty source, down from 22% in April. Over 70% said recent US trade changes would have no impact on sales or capex, suggesting that Europe’s economic base is more insulated than headlines imply.

A reluctant renaissance

Europe is not roaring. But it is rising in the ranks of global portfolios, not for what it is, but for what it is not. It is not lurching toward fiscal cliffs. It is not pushing 50% tariffs overnight. It is not caught between monetary hawkishness and political dysfunction. In a world suddenly starved of certainty, that may be enough.

For now, European equity markets are firmer, and the capital flows are following.

From Balkan banks to Italian small caps: what ties the top performers together.

Top five equity funds with 20%+ annualised returns and Sharpe above 1

In a year when much of global equity performance has clustered around mega-cap AI and european defense stocks, a group of actively managed European and emerging markets equity funds has delivered standout results. Each has posted more than 20% annualised returns while maintaining a Sharpe ratio above 1.0 over the past three years. The common denominator? A meaningful overweight to financials and a willingness to stray far from benchmark country weights.

Here are the five funds that stand out, and what drives their returns.

1. Axiom European Banks Equity (Luxembourg)

Annualised return (3Y): 45%
Sharpe ratio (3Y): 1.39
AUM: EUR 230m
Key exposures: European financials (75%), benchmarked to STOXX Europe 600 Banks

Axiom’s fund doesn’t hide its intent—it’s benchmarked to the European banks index and sticks to it with conviction. What separates it from a passive tracker like BNP Paribas’ offering is active stock selection and tactical overlay through derivatives. The fund is heavily tilted toward large-cap banks across the EU, Iceland and Norway, with room to hedge currency risk when needed. In a year when rising net interest margins and cost control have powered bank earnings, Axiom’s focused strategy has paid off.

Source: Factset

2. Lemanik High Growth (Italy)

Annualised return (3Y): ~25%
Sharpe ratio (3Y): 1.05
AUM: €136 million
Key exposures: 48% Italian equities, 34% financials, 30% industrials

Despite its generalist “high growth” label, Lemanik’s top holdings reveal a bias toward financials and industrials in Italy. While it’s benchmarked against MSCI Italy, the manager actively excludes much of the FTSE MIB in favour of smaller and mid-sized companies—at least 21% of holdings are required to be outside Italy’s top indices. That tilt toward under-researched, locally rooted firms appears to have created alpha, particularly in a recovering domestic economy.

Source: Factset

3. Apollo Balkan Equity

Annualised return (3Y): ~21%
Sharpe ratio (3Y): 1.14
AUM: €3 million
Key exposures: 24% Slovenia, 23% Croatia, 35% financials

While small in terms of market cap, it turns out the Balkans have been a quietly explosive pocket of equity performance. With strict minimums for direct stock exposure (at least 51%) and a regional focus few others attempt, this fund has benefited from strong bank earnings, relatively low inflation, and some repricing of country risk. The fund’s volatility is high, but so is its upside. Notably, over 50% of the portfolio is invested in just three countries.

Source: Factset

Portfolio Exposure

Source: Factset

4. BNP Paribas Finance Europe ISR (France)

Annualised return (3Y): ~28%
Sharpe ratio (3Y): 1.23
AUM: EUR 96m
Key exposures: Insurance 50%, Banks 35%

Unlike the other funds, this product has the specific mandate to replicate the STOXX Europe 600 Banks index. That makes it a pure play on the sector’s cyclical revival. Investors who simply wanted clean, low-cost exposure to the rising rate environment and improving European credit cycle have been rewarded. Its returns track the benchmark tightly, with tracking error capped at 1%, and only minimal use of derivatives for hedging.

Source: Factset

Portfolio Exposure – Heavy on insurance

Source: Factset

5. T. Rowe Price Emerging Europe

Annualised return (3Y): ~30%
Sharpe ratio (3Y): 1.29
AUM: USD 677m
Key exposures: 27% Turkey, 19% Greece, 63% financials

The outlier in terms of geography, T. Rowe Price’s Emerging Europe fund is a concentrated bet on banks and growth stocks in politically complex markets. Turkey and Greece dominate, but the fund also touches on frontier exposures like Kazakhstan and Ukraine. With at least 80% of assets in emerging Europe and a heavy emphasis on bottom-up stock selection, the fund has found strong upside—at the cost of elevated volatility. The high financials weighting reflects a belief that banks remain the most reliable growth lever in the region.

Source: Factset

The takeaway

All five funds differ in strategy and structure, from Luxembourg UCITS to Austrian retail funds, from passive replication to deep regional conviction. But most share a common thread: exposure to financials, tolerance for regional or index deviation, and a willingness to look beyond large-cap comfort zones. Whether by choice or mandate, that positioning has delivered both strong absolute returns and solid risk-adjusted performance, something few large-cap global equity funds can claim in today’s crowded field.

Hardly a signal of recession or rate cuts.

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Resilient spending, nervous sentiment, and the shadow of fiscal reckoning.

CEO conf calls: Three contradictions at the heart of the U.S. economy

Despite a year marked by geopolitical volatility, stubborn inflation, and rising long-term yields, the U.S. economy continues to confound expectations. Consumers are spending, employment is holding, and the dreaded recession has yet to arrive. But beneath the surface of these strong headline numbers, three contradictions have emerged—each shaping investor behaviour in different ways and exposing fault lines that may not hold forever.

1. Consumers are spending like it’s 2021, but feeling like it’s 2008

The most striking tension lies between consumer sentiment and consumer behaviour. According to executives at American Express and Mastercard, spending trends through May are almost indistinguishable from Q1—solid and consistent. Visa, too, confirms that U.S. payments volume is tracking better than expected, and Bank of America reports that $1.7 trillion has moved out of consumer accounts into the broader economy year-to-date, a 6% increase from last year.

Yet this activity is set against a backdrop of deep pessimism. As Amex put it bluntly: “Consumer sentiment is in the toilet, but they’re just complaining as they go spend.” TransUnion adds that while employment and wage growth remain strong, “the consumer is very worried.” It’s a paradox that underscores the stickiness of post-COVID wealth buffers and behavioural inertia—consumers may not feel good, but they’ve learned to keep moving.

2. The labour market is tight, but not overheating

Employment remains the bedrock of the U.S. economy. From Equifax to Mastercard, corporate leaders see little weakness in the jobs market. Unemployment remains low, wage growth is outpacing inflation in some areas, and delinquencies are “reasonably controlled” according to TransUnion. Even elevated interest rates haven’t dramatically dented consumer borrowing habits—many have adapted to higher costs after the zero-rate COVID years.

KeyCorp, whose retail clients boast an average FICO score of 790 and wealth AUM of $61 billion, sees no signs of financial strain. Non-interest-bearing accounts are still 26% above pre-COVID levels. The picture is of a workforce that is employed, creditworthy, and still engaging with the economy—even if uneasily.

3. Resilience masks a growing fiscal drag

While short-term indicators are encouraging, long-term risks are quietly building in the background. Goldman Sachs highlights a shift in bond market focus from inflation to the U.S. fiscal deficit. As deficits persist and debt issuance grows, there’s rising concern that long-term yields will continue to climb—not due to growth expectations, but because of supply and fiscal uncertainty.

The risk is straightforward: higher long-term rates increase the cost of capital, which could act as a structural brake on future investment and economic expansion. If the consumer is the wind in the sails of the economy, the budget may soon become the anchor.

The takeaway

The U.S. economy isn’t in a soft landing or a hard one—it’s flying on one engine while the other sputters. Spending holds, jobs remain plentiful, and corporate earnings show resilience. But the data also reveals an uneasy balance between strength and strain: confidence is brittle, fiscal risks loom, and monetary tightening hasn’t finished echoing through the system. Investors and policymakers alike are navigating a landscape defined less by immediate crisis than by the slow erosion of certainty.