Thoughts of the Week
Referring to another very famous song of the 80s in our newsletter might seem odd (again). R.E.M.’s emblematic song is basically a long rant, with obscure lyrics and one needs to have a PhD in philosophy to understand what they really want to say. Thinking about it, President Trump’s posts on social media and his Middle East strategy (or lack thereof) do not make sense either.
The world has entered a new phase, where geopolitical as well as business uncertainty has become the norm. Trump’s aggression (Greenland, Venezuela, Iran) and attack of long-lasting allies (NATO, Europe) should result to a structural shift in how the world views the US, for the foreseeable future. The West and Asia had already been losing patience with the US tariffs ; Europe had to put up with frequent verbal attacks on European institutions and Trump’s short-lived flirt with Putin. The UK has started “hugging” again the European Union, after it realized that their Anglo-Saxon friend has betrayed them. Canada has been striking important trade deals with China and now, the Gulf countries who had been supporters of the US find themselves in total chaos and they seem to have only one choice : to unite and find ways to cooperate with Iran on oil transport and not blindly trust the US again. Last but not least, Trump’s post that he is going to “obliterate Iran’s civilization and send it back to the stone age” has clearly demonstrated to the world that the US does not care anymore about international law or the Geneva convention.
The Iran conflict might not have a winner yet, but there is a clear loser: Trump and the US. Despite its undisputable firepower, military and technological supremacy, the US appears to be cornered. Because there is one very basic field on which the US is particularly weak: its finances. We have repeatedly said that given its exploding debt and fiscal deficit which is financed by its (ex) allies, the US cannot stand on its own feet. We can imagine the US Treasury secretly warning Trump that they simply cannot afford another lasting spike in inflation and higher interest rates, or lose their unlimited access to international capital. But unfortunately, arrogance usually comes with ignorance and lack of self-knowledge, and the next step in the military conflict is something we should not even attempt to forecast.
But longer term, the investment implications of this changing world could be profound. Without claiming to be the world’s best forecasters, it is safe to assume that we have entered a multi-year period of the world gradually detaching itself from US assets. This de-dollarization process had already begun a few years ago, if one looks at the data of international reserves. According to the IMF, the dollar’s share of global reserves recently reached a 26-year low , dropping to 57%, as central banks continued to diversify their holdings. This percentage was at 70% in the early 2000s. In equity markets, the US supremacy has also been put to test. In a continuation of last year’s trend, the rest of the world is performing much better in 2026 and even European equities, in the region potentially most impacted by an energy shock, are outpacing the US, at least for now.
Finally, we should not forget how AI is also changing the world, and rather fast. Last week, Anthropic sent shock waves again, as it claimed that its new model Claude Mythos has managed to identify unknown cybersecurity vulnerabilities that existed for decades in various vital operating systems. It also said that its model is so powerful that it cannot be broadly released at this stage. Software companies, once the crown of Technology stocks, tumbled once again as investors fret that many of their business models will become obsolete by AI. Blackrock’s CEO went further to advise the younger generation to not seek degrees in science but rather get specialized in manual labor jobs, which are going to flourish in this new AI world. Those of us with teenager kids have already lost our sleep.
The chorus of the R.E.M. song continued, with Michael Stipe saying “and I feel fine“. I am not so sure we can claim the same. Before we let too much pessimism affect our thinking, we have the fiduciary duty as wealth managers to navigate in this unchartered territory with extreme caution but also with alertness for opportunities that arise. At the same time, we take solace in the fact that our latest views have largely been confirmed, for now: Trump appears desperate to leave the region, the markets probably bottomed in early April and our recent increase in beaten-down , higher beta (risk) stocks seems to be working for now. But the champagnes are still in the fridge and are expected to stay there for a long time still.
Weekly highlights
US March inflation (CPI) rose to 3.3%, up from 2.4% in February but less than expected. Core inflation, which excludes energy, rose to 2.6%, also slightly less than expected. However, we should also mention that the PCE Deflator was published last week at 2.8% for the month of February. As a reminder the FED is targeting PCE inflation of about 2%, and we are already at close to 3% even before the spike in oil prices. By now, any thoughts or hopes of rate cuts by the FED this year have completely evaporated.
In a meeting of European energy ministers last week, Germany pushed for more flexibility in implementing the bloc’s methane import rules, according to the Financial Times. Regulation which was adopted in 2024 aims at limiting methane emissions from imports of energy and it requires suppliers to monitor and repair methane leaks, as well as it bans practices such as routine flaring, where gas leaks at oil and gas facilities are burned off instead of being captured. Germany’s Katharina Reiche called for a “pragmatic approach” to implementing the regulation on imported fossil fuels. The Czech Republic, Romania and Slovenia supported Reiche’s position, while Hungary went further in calling for a pause and rework of the proposed regulation. This is an important initiative to ensure ample supplies of energy, as the European Union is very dependent on imported oil and gas.
The Q1 2026 US corporate earnings season begins this week, with the major banks opening the reporting cycle today. The flow of results will be picking up through the last two weeks of April and into early May when almost 70 percent of S&P 500 companies will have reported their quarterly figures. Earnings momentum appears to be stabilizing with consensus expectations for S&P 500 sales growth at 7.7 percent—slightly below the 8.1 percent recorded in Q4 2025. EPS growth is projected at 11.8 percent.
Markets’ reaction
Global equities posted a strong rebound. The sentiment had already turned as the market was increasingly betting on yet another Trump U-turn, given the bond market turmoil and political upheaval both of which we had highlighted as potential issues for him. The cease-fire news was the catalyst to spark a rally which reached 3-4% for the major markets. Nasdaq outperformed with an almost 5% weekly gain, as the previous correction in mega caps pulled investors back in, just two weeks before their quarterly results. Europe was also strong with the Euro Stoxx 50 posting a 4% gain. With negotiations having failed for now, the week will start on a negative note, however.
The bond market stabilized, which was a prerequisite for equities to find a floor. The EUR short-end yields dropped almost 20bp from their recent highs and the 10yr German bund yield dropped below 3% again. In the US, the 10yr dropped to a low of 4.25% but the rise in March inflation put a stop on the mini rally. We remain of the view that duration of bond portfolios should be kept low and that 2-3yr EUR bonds are attractive again, as the situation remains fragile and higher oil prices are here to stay.
Precious metals moved modestly higher. Gold rose 1.5% for the week, at 4750$ and Silver touched 77$ again. Correlation with equities has remained positive unfortunately. The issue is that there are still a lot of speculative positions in the red , which had been opened at the previous highs, and a “sell-the-rally” mood could be in place for some time. Technically, the recent correction, the test of important support levels and the current consolidation of Gold are healthy and positive developments.
In the foreign exchange market the dollar sold off. The EURUSD rose to 1.1730 again, getting back to its previous upward trend.
Chart of the week: Very few places to hide during the first quarter.
The above chart shows the performance of various asset classes during the first quarter of this year. As one can see almost all of them are negative, and only Gold provided an important positive contribution, despite its fall by almost 15% since mid-February. In equities, it is interesting to see that Emerging Markets were the only positive region, but we have to note that their drop from their early March highs was more pronounced than the developed markets. This means that in a scenario of higher oil prices for longer and uncertainty in the Middle East, the developed markets should catch up and outperform emerging markets, and hence the second quarter could look a lot different. In the bond market there was no place to hide as all sub-sectors posted losses of about 2%. The correction in bond prices has brought absolute yields in very attractive levels again, especially in the short-end (1-2years) , which is our preference for now.
Disclaimer
Sources : Chart: KSH / FactSet
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