Dr Felix Brill, chief investment officer (CIO) at Liechtenstein-based private bank, VP Bank, notes that in a departure from US president Donald Trump’s habit of escalating developments, his upcoming ‘big beautiful bill’ will see no need for this, following approval by the US House of Representatives and the Senate.
“Most likely, the bill will slightly be revised in order to make all the Republican Senators happy. But as soon as it is passed, the floodgates will be open. There would be no need for de-escalation,” writes Brill.
The tax bill, aimed to unleash trillions in tax cuts and slash spending, will also spike the US deficit by US$2.4 trillion ($3.07 trillion) over the next 10 years, this comes according to calculations by the nonpartisan Congressional Budget Office (CBO).
With this, Brill writes: “We continue to partially hedge the US currency in the mandates and stay otherwise largely close to the strategic portfolio allocation.”
He notes that with the world losing confidence in the US, investors have pivoted towards European investments instead, which in turn has helped the euro.
“The pan-European benchmark indices Euro Stoxx 50 and Stoxx 600 have almost reached their previous highs again, while the German Dax scored a new record high. This means that European equities have clearly outperformed their US counterparts so far in 2025,” writes Brill.
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Over the coming months, the CIO sees further US dollar losses.
The trade-weighted US dollar, he notes, is “significantly overvalued”, and is susceptible to further losses in view of the persistently high trade deficit.
Brill adds: “Correcting this imbalance requires more attractive US asset prices, which is primarily achieved by devaluing the dollar.”
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1Q2025 ‘poor’ debut for Trump
The first quarter of 2025 was a poor debut for Trump, notes the report.
While the US’ gross domestic product (GDP) grew strongly in the fourth quarter of 2024, it fell by 0.2% in the first few months of his second term of office.
Out of fear of tariffs, many companies stocked up heavily on goods in the first quarter, leading to import growth, while net exports dampened growth by 4.8 percentage points (ppts).
“The negative effect of tariffs is obvious. As this is a one-off, the economy is not expected to contract again in the second quarter. So there is no immediate danger of a recession,” notes the report.
Despite this, the economy is still expected to cool this year, with private households reluctant to spend on consumption in view of tariffs.
On monetary policy, the European Central Bank (ECB) lowered its key interest rates by 25 basis points (bps) in June.
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The report highlights: “The traffic light was green following preliminary inflation estimates that showed that the rate fell to 1.9% in May. Even when volatile energy and food prices are factored out, inflation was only 2.3% and therefore close to the ECB's inflation target.”
A deposit rate of 2% has also been reached, a target often signalled by the ECB.
With this, VP Bank sees no further rate cuts for the time being.
“If the core inflation rate remains at around 2% and the ECB were to loosen monetary policy further, the real interest rate would fall into negative territory. This would put the central bank back on an expansionary course,” notes the report.
Asset classes
The private bank has an “underweight” call on government bonds, as it foresees further turbulence in bond markets off the back of tariff unpredictability and where US inflation will land in the coming months.
“The US trade policy is likely to hold a few surprises in store - at least that is the lesson from the recent past. In addition, the tax reform currently being worked out by congress will cause the national debt to increase even further,” notes the report.
Investors are therefore likely to demand higher interest rates in the future, resulting in larger upward swings in yields on US government bonds as compared to downward swings.
European bond markets, meanwhile, will likely follow the yield path set in the US market.
On corporate bonds, VP Bank has a “neutral” call, noting that bond markets are concerned with yields at the long end.
In Japan, the 30-year government bond yielded 3% in May, while its equivalent in the US yielded just over 5%.
The report notes: “In addition to rising inflation, both countries have been running significant budget deficits for decades and are massively indebted.”
With Japan holding US government bonds totalling over US$1.1 trillion, the two bond markets are closely intertwined.
Thus, the report sees that Japan could sell these US securities because yields on the domestic market have risen, in order to strengthen the Japanese yen or to have a bargaining chip in the tariff dispute.
Trump's tax reform also means that new borrowing in the US will continue.
Already, there are plans to impose regulations so that banks would have to buy more government bonds.
If necessary, the US Federal Reserve (US Fed) could resume bond purchases, which would have an inflationary effect.
With equities, the private bank similarly has a “neutral” call, due to what the bank terms ‘Taco’, an acronym for ‘Trump always chickens out’.
The US president’s de-escalation of the tariff dispute between the US and China has been celebrated, as the move signals Trumps close watching of stock market reactions and the power of capital markets globally.
Despite this, uncertainty remains, with Trump’s banning of chip software sale for the production of semiconductors to China and his threats of a 50% tariff on the European Union (EU) serving as evidence.
On European equities, VP Bank has a “neutral” call, with pan-European benchmark indices Euro Stoxx 50 and Stoxx 600 almost reaching their previous highs again, while the German Dax has scored a new record high.
The outperformance of European equities over US equities in 2025 have come from the former’s benefitting via reallocations from the US as well as the planned economic stimulus and armaments programmes in the EU.
However, the report cautions that valuations in Europe have also risen as a result of the recent recovery and are no longer considered favourable.
It notes: “The longer the uncertainty surrounding US trade policy persists, the more the economic and business outlook could cloud over. The stronger euro is also having a dampening effect. It therefore appears that a lot of positive factors have already been priced in.”
Insurance-linked securities have also received a “neutral” rating, with the performance of most funds in the space coming in at just 1% to 2.5% in US$ since the beginning of the year, to which the report note is “somewhat surprising” given the 11% yield to maturity.
“It is likely that the affected bonds will remain just below the claims limit and will be reset in June for the new claims year. Their price will rise as a result. In addition, a premium is often built up before the hurricane season. The longer the season remains loss-free, the higher the rates will rise. We expect a significantly higher performance in the coming months,” writes the report.
Meanwhile, gold, which was close to its all-time high again at the start of June, comes off the back of weakness in the US dollar, to which the private bank’s report links to investors’ questioning the creditworthiness of the US.
However, despite ongoing uncertainty regarding geopolitical and economic policy, a slowdown in fundamental demand was observed.
In addition to outflows from listed gold funds and profit-taking by speculators, demand for jewellery also remains weak.
With this, VP Bank has a “neutral” call on the asset class.
The report writes: “Only if new uncertainties drive investors into safe havens will gold be able to set new price records outside the US dollar.”
