Weekly summary 17/05

Unsustainable standoff

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Weekly macro summary

There have been quite a few interesting events to analyze this week, and below I list the most noteworthy news. Let's get started:

• What any objective observer of reality can confirm: inflation is dead. In April, producer prices in the U.S. (which directly affect the Fed’s preferred inflation measure) surprised to the downside, falling 0.5%, mainly driven by a sharp reduction in the cost of services—the largest since 2009. This decline was explained largely by weaker demand in key sectors such as air transport and hospitality, impacted by the Trump administration’s protectionist policies, stricter immigration controls, and controversial statements that have affected tourism and consumer confidence.

  Wholesale service prices contracted by 0.7%, highlighting a 3.1% drop in hotel rates, a 6.9% decline in portfolio management fees, and a 1.5% fall in airfare. These components, as mentioned, are part of the core consumer price index, a key measure for the Federal Reserve, which currently targets 2% inflation.

  This scenario aligns with—and encourages—the expected resumption of interest rate cuts by the Fed, possibly starting in September or December, given the inflation slowdown.

• Trump closed the weekend with a very aggressive announcement targeting pharmaceutical companies. The president announced his intention to sign an executive order to impose a “most favored nation” policy on drug prices, aiming to align the cost paid by Americans with the lowest price paid by other developed countries. In practical terms, this would mean cuts ranging from 30% to 80% on many prescriptions compared to current levels.

  The measure focuses on applying international reference pricing, an idea already explored during his first presidency but then blocked by the courts. This time, Trump proposes a more ambitious redesign, which would affect a much broader set of medications than those currently negotiated under the Inflation Reduction Act promoted by Joe Biden, which has so far allowed Medicare to set reduced prices for only 10 drugs.

  The pharmaceutical industry has reacted with concern. PhRMA, its main lobbying group in the U.S., has already warned that any form of government price-setting is harmful to American patients, emphasizing the potential impact on investment in innovation.

  The underlying issue remains the same: the United States often pays up to three times more for the same drugs than other wealthy countries. Trump seeks to correct this imbalance and shift part of the adjustment to the rest of the world. In his words:

  Prices will rise in other countries to match, bringing justice to America for the first time in years.

  — Donald Trump

  The political reasoning is clear: if the rest of the world has enjoyed cheap drugs for decades at the expense of the American taxpayer, it is time to rebalance the scales. There are no details yet on how this new version of the program will be implemented or on the legal mechanisms the Trump administration will use to bypass the previous judicial blockade. But the announcement marks a relevant shift in his healthcare policy agenda, which now seeks to present itself as a consumer advocate against big pharma. If realized, the measure could directly affect a market worth more than $400 billion annually in the U.S. alone and one that is increasingly at the center of political debate amid the election campaign.

• The agreement reached between the United States and China in Geneva has brought about an unexpectedly positive truce in the most disruptive trade war of the last five years. Both countries agreed on a significant reduction of tariffs over the next 90 days: Washington will lower its extraordinary tariffs imposed in April from 145% to 30%, while Beijing will cut its tariffs from 125% to 10%.

  

  The announcement triggered an immediate bullish reaction in the markets, with notable gains on Wall Street, a drop in gold prices, and a strengthening of the dollar, as fears of global stagflation and a permanent break in supply chains were dispelled—at least temporarily. Although these tariffs remain far from the levels prior to Trump’s tariff offensive, the news exceeded the expectations of many analysts and investors, especially due to its speed and scale. The face-to-face meetings between Scott Bessent and Jamieson Greer with their Chinese counterparts not only show a clear willingness to avoid economic decoupling but have also returned the dialogue to a constructive ground.

  The accumulated economic impact of this trade war has been enormous: over $600 billion in stalled trade, layoffs in key industries, and a slowdown in industrial investment. Political and business pressure to avoid the definitive collapse of bilateral relations has finally borne fruit. On the Chinese side, Vice Premier He Lifeng described the meetings as frank and constructive and highlighted the substantial progress achieved. Nevertheless, both Bessent and Greer emphasized that this is only the beginning. In the next three months, both delegations will discuss unresolved issues such as non-tariff barriers, capital and labor subsidy policies, and the opening of the Chinese market to U.S. companies.

  A key component of the understanding has been China’s increasing cooperation in controlling fentanyl precursors, a demand that Trump made a flagship issue under the national emergency declaration. It is the first time Chinese representatives have shown tangible willingness to curb this flow.

  Many fronts remain open—including the tariffs removed on low-value shipments from Hong Kong and the restructuring of internal subsidies—but the shift is clear: both countries seem to have understood that a global economy fragmented by suffocating trade barriers is a common threat. As we have said from the beginning, Trump’s profile is not that of a destroyer and reckless president but that of a negotiator, and although the path will be arduous, in the end, the world will emerge with fewer trade barriers than at the start.

  It has taken little to change perception and flows in the markets: U.S. equity funds have recorded net inflows of $1.5 billion in the last month, the largest positive flow since February. This rebound contrasts with outflows of $5 billion in early April, a record in at least five years, reflecting extreme fear of an intractable trade war scenario. The shift in sentiment has been radical: only 1% of managers now foresee a recession, compared to 42% the previous month, a reversal as rapid as it is revealing of the emotional overselling reached.

  The easing of geopolitical tensions, particularly on the trade front, has fostered an accelerated return of European investors to U.S. equities. Not because anything structural has been resolved, but because the market had already priced in the worst-case scenario. The current rebound responds less to an improvement in fundamentals than to a correction of excessive pessimism. Wall Street, as so often, does not need good news, only that the bad news be a little less bad than expected.

  

• As always, the EIA, in its STEO, maintained a very pessimistic tone about the oil market and its expectations for this year and the next, although most of these forecasts are poorly anchored in observed reality. The global macroeconomic environment projected by the EIA reflects a tightening of U.S. trade policy, with more aggressive tariffs on imports from China and an uneven impact on exempted countries. This, combined with a production rebound (here their reasoning starts to falter…), sets a downward trend for oil throughout the coming year.

  For oil itself, it forecasts a gradual decline in Brent prices from the current $65/b to $62/b in the second half of 2025 and $59/b in 2026. This drop will be driven by sustained production increases (1 million b/d per year) and inventory build-ups. Supply is expected to grow between 1.3 and 1.4 million b/d annually through 2026, with most of the increase coming from non-OPEC+ countries. Looking at the actual data, OPEC production is not rising and, unless there is a major price surge, it will fall during the year. Specifically, to summarize, they describe the market as follows:

  • U.S. oil production remains robust at 13.42 million b/d for 2025 (+90k b/d m/m) and 13.49 million b/d in 2026 (+70k b/d m/m).

  • Dry gas production falls slightly: 104.9 Bcf/d in 2025 and 106.4 Bcf/d in 2026.

  • Global liquids production is estimated at 103.7 million b/d in 2025 and 104.6 million b/d in 2026.

  As usual, pure fantasy.

  It did not help prices that Donald Trump stated that the United States is very close to closing a nuclear deal with Iran, and that Tehran had at least partially accepted the proposed terms. The statement was made during his visit to the Gulf, amid discreet negotiations that have intensified in recent weeks but are still far from resolving the main points of friction. Nevertheless, Trump’s message had an immediate effect: crude prices fell about $2 amid expectations of sanctions relief that would allow Iranian oil to return to the market.

  Iran continues to maintain its right to enrich uranium on its territory as a red line, although it has shown some flexibility: it would be willing to reduce enrichment levels and eliminate part of its most concentrated reserves, as long as the thresholds agreed upon in the 2015 deal are respected. However, the major obstacle remains Washington’s refusal to lift the harshest sanctions without an explicit Iranian renunciation of domestic enrichment, something Tehran considers unacceptable. Additionally, there are disagreements over the final destination of the enriched uranium to be removed, and whether this process would be staged, as Iran proposes, or immediate, as the U.S. demands.

  Meanwhile, Iran has sent signals that it would accept stricter international inspections, limit enrichment exclusively to civilian use, and commit not to produce nuclear weapons. But the context does not help: the exchange of statements between leaders of both countries has escalated again. The key, beyond the technical content of the agreement, is that both sides seem to be measuring every gesture with a logic of containment. Nobody wants the military path. But nobody wants to make the first substantial move either. If a deal is finally reached, it will not be based on trust but on necessity. Iran needs economic relief after years of sanctions, and the U.S. wants to avoid opening a new front at a time of maximum global tension. The possibility of an agreement is real, but it will depend on how much both sides are willing to pretend they are not yielding while, in practice, each takes a step back.

Model Portfolio

The model portfolio's return is -2.58% YTD compared to +1.64% for the S&P500 (our portfolio mesured in € terms, which is weighting -10% in our portfolio this year vs the S&P in $), and +63.3% versus +47% for the S&P500 since inception (September 2022). The model portfolio, as of Friday's close, is as follows: