From Penalty Kicks to Macro Risks
CITI’S TAKE
Since our last asset allocation, the Middle East conflict has escalated again, with oil recovering much of the June losses. Rates have taken their cues from oil, while equities and FX have remained more stable so far. We remain overweight equities, as we still expect an eventual conflict resolution. But the size is reduced, as we took profit on our Emerging Asia long in early July. We remain long the US, being less sensitive to oil, but note that our “Generals” indicator is not far from triggering, which would be equity negative. In duration, we stay neutral, underweight the US, now against Bunds (replacing Gilts), given that US duration is impacted both by oil and the AI boom. Bunds are a better overweight given higher oil sensitivity of Gilts, and less fiscal risks. We remain underweight credit as an equity hedge, and long base-metals. Our EUReka model is flat USD.
In equities, we stay overweight — We favor the US as a less oil sensitive market. We cut our EM Asia overweight in early July given poor technicals and retail positioning. While we do not think that the AI story is over yet, we would note that our risk management tool, which we employ during bubbles, the “Generals”, is not far from triggering, which would be a negative sign.
In sectors, long cyclicals — We remain long tech and industrials, as cyclicality will likely come back once the oil spike crests. Tech may also once again prove to be less oil sensitive, similar to March this year, as broadening requires lower oil prices, most likely and industrial earnings are positive so far.
In rates, we stay neutral duration — The US remains an underweight, given that it is impacted both by oil and by the impact of the AI boom. We switch our overweight from Gilts to Bunds, given higher oil sensitivity of Gilts, and as our European strategists are worried about fiscal risk into the budget in H2. We cut our Japan underweight earlier, on concerns of GPIF or Nisa related inflows.
In credit, we stay underweight — Credit remains a hedge for our equity overweight.
In commodities, we remain overweight base metals — We are neutral on energy, as there are two sided risks, in case the US administration finds a way to restart the negotiation process. It is also premature to buy the dip in gold in our view. We remain long base metals given still strong growth momentum.
In FX we are neutral — We had cut our USD long post CPI. While the CPI impact has been superseded by strong oil prices, uncertainty in Middle East can still go both ways. We follow our EUReka model is also currently neutral in FX.
In illiquid, we stay long Uranium.
House Views July 2026
Still long in equities. We tactically reduced our equity risk in early July by cutting emerging Asia, but we stayed with our US overweight. The main argument is that liquidity is still relatively supportive, earnings revisions keep coming in positively, and sentiment is not as bullish as it typically is at major tops. AI fears are likely overdone, and the Middle East situation could still be resolved, leaving two sided risks. Having said that, our Generals warning indicator (multiple market leaders falling below 200dma) is not far from triggering, which is our favorite risk management tool, when in bubble territory, a continued Iran escalation, or a more hawkish than expected Fed could trigger this red flag over the next weeks. In sectors we stay long tech, which may have a lower oil sensitivity, and industrials.
Switching from Gilts to Bunds in rates. We have been neutral on duration for some time, with a US and Japan underweight against a UK overweight. Although our calculations suggest they won’t be structurally meaningful (note), we cut our JGB underweight earlier this month on the back of sentiment shifts around potential infows from GPIF or NISA, but suggested the BoJ remained underpriced. While those inflows, if they happen, may not change the trend, JGBs are oversold enough to react well to it initially. Today, we switch Gilts for Bunds, as Gilts are more oil sensitive considering the Iran risk, and as our European rates strategist is worried about the fiscal stance into the budget later this year. While Bunds are of course also very sensitive to oil, we have repriced the ECB significantly already, suggesting limited additional downside. We remain underweight the US, even though we do not expect a hike in July and probably not even in September, as the risk is that the AI boom will eventually broaden without the labor market weakening.
We reiterate our IG credit underweight. We remain underweight in both US and EU IG credit, as a hedge for our equity overweight. Plentiful issuance has led to a pullback in spreads, and in case of an escalating Middle East conflict, we would expect credit to partially protect the portfolio.
Neutral in FX. We have been long USD but cut it after the low CPI. While the CPI print is ancient history at this juncture given the higher oil prices, we note that the EUR downside from higher oil has been somewhat limited, probably given the more oily reaction function of the ECB. Our EUReka model is also neutral.
Long base metals in commodities. We remain neutral on energy, given two sided risks, as the Trump administration is probably still very open to move back to negotiations. It is premature to buy the dip in gold, given Iran conflict risk in our view. We remain long base metals. Aluminum is typically not negatively impacted by the Strait of Hormuz closure, though copper would only benefit if the conflict is relatively short lived.
Moderately risk on. Overall, we reduced some risk, but stay overall risk on, with some hedges.
