�۶���Ƶ

Podcast: Investors Club: The Fed, the US dollar, credit opportunities, and gold (16 mins)
�ʴǻ峦������:��Jump Start: Labor market concerns, last stages of earnings season & US tariff (5 mins)

What happened?
A confluence of fresh US tariffs, weaker economic data, mixed corporate earnings, and upcoming US institutional leadership changes triggered renewed volatility late last week, driving equity markets down, Treasury yields lower, and fueling increased volatility across currencies and commodities.

US President Trump announced a wave of new tariffs on 69 trading partners, with rates ranging from 10% to 39% (in particular 35% for Canada, 25% for India, 20% for Taiwan, and 39% for Switzerland) and taking effect after midnight on 7 August. The breadth and severity of these tariffs reignited concerns about global trade and growth, especially as they follow a period of optimism after recent trade deals and positive talks with China.

Friday’s labor report for July disappointed, as the three-month moving average of payrolls growth fell to just 35,000—down from 150,000 previously and the slowest since the pandemic. The White House later removed the Bureau of Labor Statistics (BLS) commissioner, raising questions about data continuity and independence. On the same day, Federal Reserve Governor Adriana Kugler announced her resignation, effective 8 August, several months ahead of schedule. Her early departure creates a near-term vacancy on the Federal Open Market Committee (FOMC), adding uncertainty to the Fed’s policy outlook at a critical juncture.

Corporate earnings, meanwhile, were mixed. While Meta and Microsoft delivered strong results earlier last week, Amazon shares fell sharply on Friday after weaker-than-expected cloud growth. Apple also warned that new tariffs would add USD 1.1bn in costs.

As volatility returned, the S&P 500 fell 1.6% and the tech-heavy Nasdaq declined 2.2% on Friday, with losses concentrated in interest rate-sensitive sectors. Treasury yields declined sharply across the curve, with the 2-year yield falling 28bps and the 10-year yield down 16bps, both reaching their lowest levels since May. The US dollar weakened, while gold surged 2.1% to USD 3,360/oz on lower real yields.

The sharp drop in Treasury yields has also shifted expectations for Fed policy, with fed fund futures now pricing in 130bps of total cuts and a 92% chance of a September rate cut.

What’s the context?
As highlighted in our latest Monthly Letter, “Quiet, too quiet,” this return of volatility should not be unexpected.

Our base case remains that US tariffs will eventually settle around 15%. While this would be the highest since the 1930s, and six times higher than when Trump returned to office, we do not expect it to cause a recession or end the equity bull market. However, in the near term, the “handshake” nature of trade deals agreed so far means that tensions could resurface as the details are negotiated. Friday’s punitive tariffs on a range of nations—including Switzerland—mean further urgent discussions lie ahead. Our base case is that a deal will be reached with Switzerland, lowering tariffs to 15%. But if near-40% tariffs persist, the economic impact could be significant and may prompt further easing by the Swiss National Bank with central bankers potentially aiming for a higher EURCHF exchange rate (more ).

In addition, the unspecified "penalty" on India and the elevated levies imposed on Indian goods should be considered as part of Trump's effort to pressure Russian President Putin into concluding a ceasefire with Ukraine. Trump has threatened "secondary" tariffs against nations with strong ties to Russia. With the price gap between Russian and global oil narrowing, we see room for compromise. We also view much of the recent rhetoric as part of the negotiation process.

Separately, US economic data releases are likely to be volatile, particularly following a significant change in government trade policy. Although Kugler’s exit removes a known dovish voice from the committee, the focus for markets is the implications of the upcoming appointment and the broader policy stance. The profile of the new Fed nominee—whether policy-driven, institutionally seasoned, or otherwise—will be closely watched for its impact on the central bank’s decision-making.

Meanwhile, the Treasury’s focus on short-end issuance and long-end buybacks in addition to moves toward bank deregulation and the promotion of stablecoins to generate demand, has so far kept term premium and long end rates stable. Recent data releases have been consistent with our view that cooling growth and slowing job creation will allow the Fed to start cutting rates in September, with 100 basis points of easing by June 2026.

However, this outlook remains fluid: clarity on the Fed appointment, the execution of Treasury buybacks, auction demand, and, crucially, the path of inflation and growth data will all be key. While ongoing disinflation and economic growth cooling would support further easing, an upside inflation surprise could quickly upset this picture.

Finally, despite the market disappointment at Amazon results, the broad strength of the S&P 500 second quarter earnings season has been encouraging. Strong results from Meta and Microsoft underlined their commitments to further increase capital spending on AI and reinforced our confidence in the outlook for tech. We now expect global AI spending to hit USD 375bn this year, up 67% from the 2024 level. For 2026, we anticipate another 33% growth to USD 500bn.

How to invest
We expect this period of volatility to prove to be an opportunity rather than a reason to retreat:

Prepare for market volatility. Recent market moves underscore that the path to our base case is unlikely to be smooth, and investors should be prepared for further bumps along the way. We expect market upside over the coming 12 months, and greater tariff certainty will help support that. At the same time, after a strong rally and with tariff and economic uncertainty now rising, we believe that markets will continue to be vulnerable to volatility in the near term. Investors who are already allocated to equities in line with their strategic benchmarks should consider implementing short-term hedges, and those underallocated should prepare to add exposure on potential market dips in the weeks ahead—particularly in areas like AI, power and resources, and longevity.

Buy quality bonds. Yields fell across the curve, reinforcing our case for quality fixed income. We continue to see an attractive risk-reward profile in quality investment grade bonds. Yields remain relatively high for quality fixed income, which should be the main driver of total returns going forward, while in our view the risk-return tactically for high yield bonds and senior loans looks less appealing at this stage owing to tight spreads. Additionally, given our view that the Fed will continue to lower the policy rate from here, high quality fixed income offers the opportunity to lock in rates higher than prevailing returns on cash, with the additional benefit of potential capital gains if the Fed needs to cut more aggressively. We favor medium duration (five to seven years) exposure, given that we still see risks of higher volatility in the long end of the curve. We remain alert to the risk that an upside inflation surprise—particularly ahead of the September Fed meeting—could challenge the current path for yields and curve shape.

Navigate political risks. The threat of secondary tariffs and renewed tensions with Russia highlight the importance of hedging against geopolitical uncertainty. We also note that institutional changes, such as the recent BLS and Fed leadership shifts, may add to market sensitivity around policy signals and institutional independence. We believe an allocation to gold remains an effective hedge against residual geopolitical and political uncertainty. We maintain our USD 3,500/oz target and do not rule out the potential for prices to exceed this level if risks escalate.

Reduce excess dollar exposure. The US dollar lost ground as weak US economic data weighed on sentiment and increased the probability of Fed interest rate cuts in September. We see scope for further dollar weakness ahead, given the US’s significant fiscal and current account deficits and an ongoing trend of overseas investors re-evaluating US dollar exposure. In addition, recent questions around the changes at the Fed and data agencies have added a layer of uncertainty that could amplify dollar volatility. While high US interest rates make hedging dollar exposure expensive, we believe investors should review their currency allocations and align them with those required to meet liabilities or spending plans.