Generali Asset Management: what to expect on the markets in the short term?

Comment by Antonio Cavarero , Head of Investments at Generali Asset Management, part of Generali Investments

The latest macroeconomic indicators suggest a possible soft landing, with growth slowing and inflation gradually aligning with central banks' targets. Confidence in both manufacturing and services sectors is below growth thresholds, hinting at a slowdown. Meanwhile, recent Consumer Price Index (CPI) and Producer Price Index (PPI) data show a slow but steady decline towards target levels.

Inflation

Unsurprisingly, inflation is and remains central in any assessment by central bankers, who need to find the right balance with expected growth trajectories.?On this front, Fed Chair Powell highlighted the potential impact of restrictive monetary policy on the labor market, suggesting a possible shift in the Fed’s focus towards supporting growth over price stability, but still with the need for benign inflation prints.?ECB has more room for maneuvering, but also here disinflation can’t be given for granted.

Politics and geopolitics

Political developments and geopolitical threats are influencing financial markets.

• French elections reminded everybody that political stability is an element that market participants look carefully at: if a hung parliament prevent extreme policies to become implementable, still the lack of reforms will likely be a burden.
• In the United States, within an extremely unusual electoral campaign that saw an attack to a presidential candidate and the other one dropping out, markets are discounting a higher chance of a Trump victory.?“Trumpnomics” are seen as good for business and, therefore, good for equities, but also a possible additional burden to the US debt profile.

The optimal portfolio

Given this backdrop, the view remains favorable towards government bond investments, particularly in Europe, where the monetary policy path seems clearly outlined.

Corporate bond investments are still supported by carry strategies, even if their capabilities to outperform government bonds seems limited at these levels.

In the equity market, mid-year earnings expectations appear very high. After the rally in the first half of the year, a few weeks of partial correction in major indices was probably due: evaluations need to find confirmation in the incoming earnings while political uncertainties are still to be solved.?

Dollar dominance might be questioned by a possible Trump administration, who historically prefers a weak currency, but the lack of viable alternatives and a solid US economy might prevent this from happening.

In conclusion?

As the financial markets navigate the intricate interplay of macroeconomic indicators, geopolitical events, and central bank policies, a data-dependent and cautious approach is essential.

By balancing risk and opportunity across fixed income, equities, and forex markets, investors can strategically position themselves to weather potential volatility and capitalize on emerging trends.