Pictet AM: Barometer Irrational exuberance

Asset allocation: too far too fast

With a slowing global economy at risk of being undermined further by the various trade spats initiated by US President Donald Trump, the US Federal Reserve once again made its presence felt in global markets. One after another, Fed policymakers indicated that the central bank was prepared to insure against a serious downturn with pre-emptive rate cuts, helping lift global equities and bonds by some 6 per cent and 1 per cent respectively on the month.

The market is now discounting a full percentage point of rate cuts over the coming 12 months, starting with a reduction in July. Not only is the S&P 500 index back near record highs, but more than USD12 trillion of global debt is trading at negative yields.

In our view, however, the euphoria over US interest rate cuts is overdone – the first rate cut could well be delayed until September.

As a result we’re downgrading bonds and are now underweight both fixed income and equity; we have also raised our weighting to cash.

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