Are temperatures set to rise into the summer?

Mark Dowding, BlueBay CIO, RBC BlueBay Asset Management, looks at the outlook for the US, UK, Eurozone, and risk assets.

US Budget

RBC BlueBay continues to favour a 2/30 curve steepening stance in US Treasuries. The Budget is currently being negotiated within the Senate, and here there is a risk that there is some pushback on planned cuts to Medicaid spending. There seems little evidence that the US fiscal deficit will be coming down any time soon.

European assets

In the short term, European assets have benefitted from increased flows, which has prompted some regional outperformance in recent weeks. However, RBC BlueBay would be wary of yields falling too far, given that fiscal risks could be underpriced.

UK economy

It may seem that UK voters have little enthusiasm for greater military spending at a time when the country faces difficult fiscal choices, and society would rather see cash diverted towards improving other public services, notably healthcare.  From this perspective, the Starmer government remains boxed in by the fiscal framework on one side and the bond market on the other. For the foreseeable future, it seems there is limited scope for this to change.

US dollar dominance

RBC BlueBay continues to hear of asset allocation shifts taking demand away from the US dollar. Indeed, if there is a renewed period of volatility then the firm could envision a more rapid move weaker for the greenback, given fears that the dollar itself has tended to trade like a risk asset over the past couple of months.

Global trade tensions

While May was characterised by a moderation of trade concerns, it appears that tensions may be set to escalate once more, with the US trading barbs with the EU and China over recent days. Markets have tended to assume that trade worries will melt away. But as we head towards the G7 meetings held in Canada in the middle of this month, RBC BlueBay sees a risk that these resurface and put more pressure on risk assets, with market participants looking towards Trump’s July 9th tariff deadline date.

Future volatility

Until now, investors in equities and other risk assets have been rewarded to keep buying, as markets rally into a wall of worry. However, RBC BlueBay believe this price action may be losing momentum and so this is a moment to adopt a more cautious stance. Following a period when complacency appears to have risen, the firm would not be surprised if volatility doesn’t pick up materially again over the course of the coming month, with trade negotiations coming back to centre stage.