Global | What do you make of a potential peace deal between Ukraine and Russia?
At face value, a peace deal should be a positive catalyst for markets, particularly in Europe. So why did markets close on a mixed note last week? Markets traded without a clear direction. The STOXX 600 index eventually closed flat, and the German Dax fell (although it rebounded in early trading this week, following the results of the German election; see below). The US dollar, the euro, government bonds and oil prices also ended the week flat. Only gold prices closed in positive territory.
It's because geopolitical tensions ramped up last week, surprisingly because the US and Russia began peace negotiations over Ukraine. Regardless of whether we think excluding Ukraine and European allies is the right approach or not, we ask ourselves whether this could be a game changer for our investment positions and what opportunities and risks we see.
We think our baseline scenario is on track. We still expect growth and inflation to normalise and central banks to lower interest rates, with occasional bouts of volatility. While a peace deal is a potential positive catalyst for Europe, the political difficulties in Germany and France come at a difficult time for the eurozone. We’re seeing a stagnant recovery, slow growth in key trading partners and rising challenges from US trade policies, including potential tariffs. Given this balance of risk, we are remaining neutral on European equities until we get more certainty that a peace deal could be sustainable.
A more fragmented world has been one of our core theses of the past few years. It’s about geopolitical tensions that don’t fully ease and instead flare up from time to time. We are positioned for this and have constructed portfolios to cushion bouts of market volatility. We own broad commodities and gold for when supply chains are impacted by trade or geopolitical jitters. We hold equity ‘insurance’ instruments that appreciate when the market falls. And we’re diversified within equities and bonds. This is how we tackle the unpredictability of these events.
German federal election | Can the new coalition put forward significant reforms?
Germany has voted, with the CDU/CSU winning the election, even if its 28.6% is slightly below expectations. As two smaller parties didn’t manage to reach the necessary 5% vote to enter the Bundestag, a grand coalition with the Social Democrats (16.4%) looks most likely. CDU/CSU leader Friedrich Merz is likely to be the new Chancellor, taking over from the SPD’s Olaf Scholz. While a two-party coalition looks like good news as it should be more efficient than several parties sitting around the government table, there’s also bad news for the new government. It will face a possible blocking minority by two populist parties, the AfD (“Alternative für Deutschland”, 20.8%) together with The Left party (8.8%). This might limit fiscal space for the incoming Merz government, as together these parties gained more than one-third of seats and could, therefore, jointly block any changes to the German constitution, including adjustments to the debt brake (a looser brake would give Germany extra room to borrow and spend). However, from a market perspective, we regard the outcome as slightly positive, as Germany should be ruled by only two overall centrist parties going forward.
What we’re watching this week
It’s a relatively quiet week on the economic front, which will likely leave markets exposed to ongoing (geo)political developments. US consumer confidence for February (Tuesday) should show continued support for the current solid spending trend. The Fed’s preferred measure of inflation (Friday) will likely underscore the central bank’s view that it should hold interest rates for now.
In the eurozone, preliminary inflation releases for February for Spain (Thursday) and Germany, Italy and France (all Friday) are likely to confirm that inflation is around target. We think the European Central Bank will cut interest rates further in 2025, which underscores our preference for short-dated European government bonds.