Citi Wealth Insights

• Bond implications: US Treasury bond yields and the US dollar remained anchored on the news, defying their traditional role of rallying sharply as “safe haven” assets. These muted reactions confirm investor hesitancy to rely on historic asset correlations to hedge portfolios. To us, longer-term bonds appear reluctant to break meaningfully below these short-term yield levels despite favorable May inflation data released this week, successful refinancing auctions of both the 10y and 30y, and presumably some “flight-to-safety" buyers due to this new Middle East conflict. The combination of tariff-driven price increases keeping inflation firm, and the likely deficit-enhancing US budget bill will require investors to demand additional levels of income for holding longer-dated bonds or increasing the “term premium.” As a result, we see rates as upwardly biased, and we remain on pause in adding additional duration to portfolios despite the recent rally in rates.
• On gold: One beneficiary of “safe haven” demand is gold, which initially jumped 2% on the news, continuing its rally over the past month and about 2% from the all-time high (our Global Investment Committee recommended adding gold to core asset allocation portfolios last week). The jump in gold without a corresponding increase in Treasury prices is very unusual and is one more signal that there is a shift towards gold as a primary reserve asset. Indeed, this week the ECB reported that as of the end of 2024, gold had moved into second place in total global central bank reserve assets (ahead of Euro-denominated assets), with gold constituting about 20% of total reserves. 
• On equities and tariffs: Global equities are lower since Thursday evening, but the selloff has initially been relatively mild. Assuming the Israel-Iran conflict doesn’t spiral into a wider regional war, we expect equity investors will soon refocus back on trade and underlying US economic health. Lackluster equity performance following this week’s constructive talks between the US and China are a signal to us that new trade deals may be losing their potency as drivers of new rallies. We are also wary that sector tariffs could be announced at any point. Escalation of hostilities in the Middle East on top of tariff uncertainty keeps us on the sidelines from adding to risk at these market levels. We prefer to maintain our neutral positioning across global equities.

Read more in your Citi Mobile® App’s Digital Library*.

• While fears over Chinese AI upstarts and US export restrictions drove a selloff in AI infrastructure stocks earlier this year, results from earnings season confirmed the durability of AI-enabler earnings and helped prices rebound. We believe the sheer scale of global data center capex should continue to support economies and equity risk over the medium term. For context, during Q1 earnings season, the big four hyperscalers reiterated their plans to invest $324bn this year, or 1.1% of US GDP. This figure doesn’t include recently announced investments from Gulf states or the US Stargate program. With margin pressures already mounting for many firms, we believe AI adoption is likely to accelerate as firms seek to boost workforce productivity. We therefore continue to favor AI-related investments as a secular source of growth within equity markets. 
• While this week’s court decisions blocking (and unblocking) broad-based US tariffs are likely to slow the pace of trade deal announcements, we expect the administration to adjust its strategy. We continue to believe widespread use of tariffs will be a feature of US policy for the next 3 and a half years and economic impacts will remain difficult to judge. Recent "soft data" surveys indicate a slight rebound in business and consumer sentiment as tariffs are rolled out with somewhat less intensity. Meanwhile, we view the resiliency in real economic activity data as reflective of a pull-forward in demand ahead of tariffs. While we ultimately think businesses and consumers will still need to share the burden of higher tariffs, benign current conditions and still-elevated inflation concerns support an on-hold Fed for now. Meanwhile, we expect monetary policy divergence over the balance of 2025 as other global central banks have more freedom to ease.
• We expect the Senate will make material revisions to the House-passed reconciliation bill in the coming weeks, and the resulting bill may deepen worries around US fiscal sustainability. While most estimates of the House-passed bill suggest that the deficit-to-GDP ratio will remain unchanged at ~6.4% after 10 years, we view this legislative effort as confirmation that neither major US party has the appetite to fix structural debt issues. As it stands, the bill will likely have two primary effects: 1) it will be marginally stimulative for the economy, offsetting some of the tariff pain through domestic investment incentives, and 2) it will increase the need for Treasury issuance, putting further upward pressure on interest rates. In conjunction with the Moody's downgrade and rising global yields, potential for fiscal angst in the coming weeks keeps us underweight duration within our fixed income allocation. That said, we are actively evaluating at what higher levels in rates we can comfortably add back to duration as both an investment and as a hedge to equity risk.
• Bottom line: With equities back to near all-time highs, investors are growing increasingly immune to tariff announcements – especially now that the courts are involved. With valuations stretched on still-uncertain fundamental estimates, coupled with rising bond market term premium, we remain cautious on adding new equity risk to portfolios.

Read more in your Citi Mobile® App’s Digital Library*.