Jump Start podcast: US rates, Treasury demand, and oil supply (3:40)
Listen in for key trading events in the week ahead, with CIO's Jon Gordon

Manager's Perspective video: geopolitics in perspective (19:32)
Wellington's Geopolitical Strategist Thomas Mucha analyzes national security and investment themes.

Thought of the day

Finance ministers from the Group of Seven (G7) economies assembled in Northern Italy late last week, with the focus on China trade and industrial policy, currency moves, and geopolitical conflict. While reaching consensus has historically not been easy, the more fractious global backdrop appears to have added renewed urgency in finding common ground.

Though an immediate market impact is unlikely, we see several threads that stand out for investors:

The G7 looks increasingly united on China trade imbalances. The G7 finance chiefs escalated their concerns over production overcapacity from China, with the communique calling out the “comprehensive use of non-market policies and practices that undermine our workers, industries and economic resilience”. France’s finance minister was more blunt, telling Bloomberg that China’s economic model is a threat to the EU, the US and “the global world economy”. This followed US President Joe Biden’s action on Friday to reimpose tariffs on hundreds of exports from China, and comes as the EU nears a conclusion on its Chinese EV subsidies investigation.

The strong dollar is causing discomfort. While the DXY index, which tracks the US dollar's performance against six major peers, is down around 1.5% since its late-April high, the USD remains supported by its elevated yield and still-hawkish Fed speakers, keeping the Japanese yen near multi-decade lows. Following reported lobbying by Japan, the G7 finance ministers' communique reaffirmed caution against “excess volatility” in FX rates and “disorderly currency moves,” in line with the April meeting text that preceded suspected FX intervention. Yen weakness remains a key concern in Tokyo, with Japan's top currency policy diplomat last Friday warning the government could step in at “any time”.

Markets, banks face unresolved geopolitical risks, with Ukraine the most pressing concern. Finance ministers reportedly made progress on plans to leverage some USD 300bn in frozen Russian assets to extend loans to fund Ukraine with the final text possibly ready for G7 heads of state approval in June. The World Bank president on Friday suggested his organization could administer such a fund. Separately, US Treasury Secretary Janet Yellen warned European banks faced an “awful lot of risk” operating in Russia, and that the US is considering strengthening secondary sanctions on lenders.

So, while the overall economic and market backdrop looks supportive, the latest G7 communique is a good reminder of how disputes over trade, policy and geopolitics continue to simmer and may yet revive volatility. In equities, we see modest upside overall, and focus on capital preservation strategies and selectivity. We think trade disputes may worsen into the US election, and recommend a barbell strategy in China equities to cushion against potential action. Investors seeking geopolitical portfolio hedges may consider exposure to both gold and oil. On currencies, we recommend investors stay selective in taking directional dollar trades, with the Australian dollar a stand out for its rates outlook and commodity exposure. We would consider using any bouts of yen strength toward the 150–152 level to unwind long yen positions and rebuild USD exposure.