The Iran conflict has moved from an acute crisis to a fragile de-escalation, but a fuller resolution remains elusive. Market sentiment may still be tied to developments in the Middle East, but we believe that the bulk of the disruption is now behind us, with the Strait of Hormuz transit resumed and the risk of prolonged higher energy prices reduced.
Our macroeconomic outlook remains optimistic, with risks tilted to the downside. The U.S. economy is central to this view. We believe it can absorb elevated energy prices, as seen in 2023 and 2024, with growth likely to re-accelerate on technology-led productivity gains. We expect U.S. inflation to moderate, albeit delayed by elevated energy prices, with scope for the Fed to ease monetary policy next year.
Other developed economies should remain resilient, supported by moderate growth and easing inflation. Japan is the exception as policy tightening continues. The Middle East conflict poses upside inflation risk in Europe, amplified by its reliance on energy imports.
Given our central views, we maintain modest overweight positions across credit sectors, biased toward higher-quality investment-grade corporates and securitized assets. Rising dispersion in credit is reinforcing the case for diversification and strong bottom-up analysis. We favor a long duration position, particularly at the front end of the U.S. curve, as well as in emerging markets, retaining flexibility given upside inflation risk. We are positioned for steeper government rate curves to protect against an economic slowdown or expansionary fiscal policy.
In our currency strategy, we hold a diversified basket of overweight positions that include the euro, the Japanese yen, and the Brazilian real. We hold these positions against the lower-yielding Swiss franc and a modest U.S. dollar underweight.
