David A. Meier, Economist, Julius Baer
The USD remains firm, but we continue to view its strength as temporary. Support from elevated oil prices, safe-haven flows, US growth outperformance, and aggressive Fed expectations will likely fade over time, paving the way for structural headwinds to gain importance.
Despite some modest softening since beginning of the month, the US dollar remains strong, with EUR/USD trading around 1.12 and the DXY Index near 101.8. At first glance, this may seem at odds with our expectation of a weaker dollar over the coming quarters. However, we continue to believe that the factors currently supporting the greenback are largely temporary in nature. Higher oil prices due to the Hormuz crisis have been an important driver, with positive correlation since the US has become a net energy exporter. Our outlook, however, still points to more moderate oil prices over the medium term. Meanwhile, periodic cracks in the AIdriven equity rally have triggered episodes of risk aversion that still favour the dollar through its safe-haven status. It would take a more pronounced AI meltdown that cuts into growth and provokes Fed rate cuts to weaken the dollar. Further, the US growth advantage – an important driver of the past months – is gradually fading as a driver, given that economic activity in the eurozone is showing signs of recovery and should converge going forward. Finally, Fed rate hike expectations appear to be at a peak. Markets have recently pushed rate hike expectations further into the future, and we continue to believe that too many hikes are priced.
Beyond the cyclical outlook, the structural backdrop remains consistent with a longer-term dollar weakening regime, including persistent current-account deficits and a larger reliance on (AI) equity inflows, given receding demand for US Treasuries as investors continue to diversify. Admittedly, Europe remains the key wildcard for EUR/USD, particularly against the backdrop of political and fiscal uncertainty in France that has caused OAT-spreads to soar. Even so, we remain comfortable with our EUR/USD forecasts of 1.15 over three months and 1.20 over twelve months for the time being. These projections are indeed more aggressive than consensus, but they still remain well within the range of expectations, while the dispersion among forecasters has increased.
China: Growth stabilises; recovery remains elusive
Sophie Altermatt, Economist, Julius Baer
China’s economic growth stabilised in Q3, supported by resilient exports and high-technology manufacturing. However, weak consumption, contracting investment, and the prolonged property downturn confirm that the economy remains highly bifurcated. With year-to-date growth of 4.6% in line with the government’s official target range, meaningful additional policy support appears unlikely. We maintain our 2026 GDP growth forecast of 4.5%.
China’s GDP growth edged up to 4.5% year on year in Q3 from 4.3% in Q2. This improvement primarily reflects resilient production and exports, without a meaningful strengthening in domestic demand. Export growth accelerated further in the third quarter, led by mechanical, electrical, and other technology-intensive products. High-technology and equipment manufacturing also supported industrial production, whose growth accelerated to 5.5% in September. Retail sales growth also picked up slightly to 1.1% but remained subdued by historical standards, with services consumption continuing to outperform goods spending. Investment remained the main area of weakness, though the declines in manufacturing and infrastructure investment moderated. Property investment, by contrast, continued to record a double-digit decline, while new-home sales and construction activity also continued to contract sharply. The property sector therefore has yet to reach a sustainable turning point. High technology investment, however, continued to expand, reinforcing the increasingly uneven composition of investment.
Looking ahead, as growth remains within the official target range so far this year, additional meaningful government support measures appear unlikely. Faster fiscal execution and targeted policy-bank support for strategic infrastructure should help to stabilise growth momentum in the coming quarters, while weak private demand, subdued credit dynamics, and the prolonged property correction are likely to prevent a meaningful cyclical recovery and continue to dampen economic momentum into 2027. Rather than seeking to boost near-term growth, the government’s focus remains on technological advancement, industrial upgrading, and greater self-sufficiency.
COMMODITIES
Oil: The struggles of an analyst
Norbert Rücker, Head Economics and Next Generation Research, Julius Baer
Instead of easing towards USD 70, oil prices have surged back above USD 100, despite the fact that Middle Eastern oil exports have recovered to almost pre-crisis levels and that globally, oil storage is not in deficit. Expensive shipping and supply fears are propping up prices, but such dynamics tend to be short-lived.
Oil prices are trading above USD 100 per barrel as the conflict in the Middle East drags on. Our view on oil has been quite inaccurate since late summer and instead of trending towards USD 70, prices are back up in the triple digits. Complicating matters, the fundamental trends we based our view on largely proved accurate. The Strait of Hormuz is wide open, not closed, and exports out of the Middle East have recovered almost to pre-crisis levels. Saudi Arabia swiftly resumed operations of the East-West pipeline after the attacks, and oil tankers are once again exiting the Red Sea, both to the North and South. The shuttling of oil through Hormuz in convoys safeguarded by the US military continues despite the recent pick-up in attacks.
The supply disruption proved much less significant than estimated. Instead of tilting the oil market into a deficit, the Iran war has mainly erased the surplus that had built up in 2025. Neither kerosene nor diesel supplies have dried up against earlier fears. Indeed, oil product storage levels are low, but the situation has not deteriorated since summer. There have been unexpected trends, of course, and the key surprise includes the spike in shipping costs. Logistical challenges cannot explain the surge, as ships are visibly on the move again out of the Red Sea. Insurance cannot explain it either, as these costs were likely at least equally high earlier in the conflict. Instead, the petro-nation’s oil companies seem to be rush-buying ships and expanding their fleets to gain greater independence and a greater share of the profits.
Today’s oil prices are too lofty compared to market fundamentals. Risk premia, refining markups, and shipping cost spikes have usually proved temporary as fears and herding tend to be short-lived emotional dynamics. We stick to our cautious view for now, but our arguments require confirmation before year-end. Oil cannot wait for a real crisis forever.
EQUITIES
Swiss equities: Defensive strengths back in focus
Mathieu Racheter, Head of Equity Strategy Research, Julius Baer
Swiss equities’ strong start to the fourth quarter highlights their diversification benefits. Improving earnings revisions reinforce our Overweight stance, while their sector mix offers a useful counterweight to AI and technology exposure.
Swiss equities are regaining ground. Since the beginning of October, they have returned 5.6%, ahead of Europe’s 2.9% and the US market’s -0.1%, narrowing their modest year-todate performance gap. This strong relative performance illustrates how quickly Switzerland’s sector composition can become an advantage when the macroeconomic backdrop changes. Healthcare and consumer defensives account for around 40% and 15% of the Swiss market, respectively, while technology exposure is minimal and oil & gas is absent. Earlier this year, rising oil prices supported energy producers elsewhere, while higher bond yields weighed on defensive bond proxies. Strong AI earnings, meanwhile, sustained technology leadership. As bond yields have edged lower since early October, Swiss healthcare and consumer defensives have gained 7.5% and 10.3%, respectively, this quarter.
The diversification case nevertheless depends on the nature of the shock. An energy shock that pushes oil prices and bond yields higher can weigh on Swiss equities despite their defensive earnings profile. An unwinding of the AI trade is not our base case. However, given the concentration of many equity portfolios in AI and technology, we believe it is prudent to diversify this risk exposure. Such an unwind could create a more favourable backdrop for Swiss relative performance. If weaker AI investment expectations dampen the broader growth outlook, we would expect downward pressure on bond yields and energy demand, potentially bringing oil prices lower. Lower yields would support defensive valuations, while falling oil prices would reduce the relative advantage of energy-heavy markets. Switzerland’s limited technology exposure and substantial weight in businesses with comparatively stable demand would provide an additional buffer. The recent outperformance is consistent with this mechanism. We retain our Overweight stance on Swiss equities; improving earnings momentum supports the fundamental case, while their sector mix offers a useful counterweight to AI and technology exposure.
EU autos: Chinese hybrid import cap agreement
Roberto Cominotto, Equity Research Analyst, Julius Baer
A new China-EU automotive trade agreement puts the breaks on the recent flood of Chinese hybrid cars into EU markets. The deal is significantly better than investors had expected and could turn out to be a game changer for an industry that much of the investor base currently considers uninvestable. In the near term, however, the weak Chinese market is weighing on most European car manufacturers.
In 2024, the EU introduced additional import tariffs of up to 35% for Chinese battery electric vehicles (BEVs). While these measures significantly slowed the inflow of Chinese BEVs, Chinese manufacturers leveraged the exemption for hybrids and plug-in hybrids to channel excess Chinese production capacity into European markets. The EU and China have now agreed on a cap of Chinese hybrid exports to the EU. The official statements were very vague, and more negotiations will take place in the coming six months, but according to media reports, annual imports of hybrids will be capped at 350,000 units per annum. This compares to 2025 imports of 305,000 units and a current run-rate of approximately 700,000 units. In addition, with the soon-to-be-finalised EU Industrial Accelerator Act (IAA), Chinese car manufacturers who plan to establish European manufacturing footprints may face new rules, such as the requirement to source components from a local supply chain instead of just assembling cars in Europe with cheap supplies from China. This would significantly dilute China’s manufacturing cost advantage by exposing Chinese car companies to higher labour, energy, compliance, and supplier costs. If the measures are implemented as agreed, this could be a significant positive catalyst for the European auto sector. However, earnings will remain under pressure in the near term due to inventories of Chinese hybrids parked in European ports and continued weakness in the Chinese automotive market.
FIXED INCOME
France: Unrest widens spreads
Dario Messi, Head of Fixed Income Analyst, Julius Baer
Afonso Borges, Fixed Income Research, Julius Baer
Weekend unrest has added renewed pressure to OATs. A sustained tightening in spreads is likely to require greater fiscal credibility and clearer visibility on the post-election policy framework, neither of which appears imminent. Spread levels have not yet reached a threshold that would compel a meaningful policy response.
The striking events unfolding over the weekend inevitably add to the political uncertainty already reflected in French government bonds. However, from a market perspective, the more important point is that current levels of bond-market stress remain well below the threshold likely to force a meaningful policy response. While French government bonds (OATs) have underperformed recently, spillovers into other European sovereign markets and broader risk assets remain limited. Moreover, though proposals to reduce the fiscal deficit have been put forward, the debate has already shifted towards which measures will be rejected or watered down, rather than how consolidation could be strengthened. This suggests that policymakers are not yet facing sufficient market pressure to pursue a more forceful fiscal adjustment. As such, OATs remain vulnerable in the near term, even if this week’s rating downgrade by Moody’s is widely expected and therefore unlikely to be a major catalyst. France’s deteriorating fiscal outlook, higher financing costs, and wider deficits have been well understood by investors for some time, and OATs continue to trade significantly wider than implied by their ratings alone.
As we have argued in recent weeks, a sustained tightening in spreads is likely to require credible fiscal commitments and greater visibility on the post-election policy framework, neither of which appear imminent. At the same time, contagion remains contained. ECB anti-fragmentation tools provide an important backstop, but current spread levels and the absence of broader market stress make their deployment far from necessary. In short, the market has yet to reach the pain threshold that would force either national policymakers or the ECB to act decisively.
Core bonds: Rate-insensitive AI vs AI-sensitive rates
Dario Messi, Head of Fixed Income Analyst, Julius Baer
Afonso Borges, Fixed Income Research, Julius Baer
The AI trade has been described as ‘rate insensitive’; on the other hand, the recent sell-off supports our view that rates should become AI-sensitive in a drawdown. A deeper correction would be akin to a classic negative demand shock, with weaker investment and consumption, as well as easing inflation pressure. The diversification value of Treasuries has been consistently high in this type of episode.
At first glance, the case against core bonds looks strong. First, stock-bond correlations have once again turned positive this year. This is especially the case outside the famously “rate-insensitive” AI trade: the correlation between equalweighted US equities and 10-year Treasuries is near its highest level in 30 years. Second, memories of core bonds being particularly unhelpful in the most recent equity bear market persist: in the first ten months of 2022, when the S&P 500 dropped more than 25% peak-to-trough, 10-year Treasuries lost more than 16%. Importantly, the relationship between risk assets and core bonds is far from stable and is highly dependent on the nature of the shock. An AI-led downturn would be a lot closer to a more traditional negative demand shock, as a pullback in capital expenditure would weaken business demand directly, while lower equity wealth, tighter financial conditions, and softer hiring would spill into consumption. Reduced spending on data centres and related infrastructure would also ease demand for power, equipment, and constrained inputs, further easing inflation pressures. In other words, while the AI theme is certainly structural in nature, it has very cyclical implications as well. Overall, such slowing would likely be a disinflationary negative growth shock, and Treasuries have historically protected portfolios in this type of episode: 10-year US Treasuries consistently delivered positive returns during equity drawdowns between 2000 and 2020. In other words, recent correlation is not the final word on diversification. If the AI correction accelerates into a classic demand-destruction episode, intermediate Treasuries should again serve as an effective portfolio hedge. Against this backdrop, we recommend an overweight duration stance in the intermediate sector.
NEXT GENERATION
Artificial intelligence: Doubts and confidence
Enrico Chinello, Next Generation Research, Julius Baer
Credit worries drove an AI sell-off last week, stemming from the higher-levered data centre developers. While we see some potential financing risks for pockets of the ecosystem, these jitters are idiosyncratic and do not expose cracks in demand nor in the fundamental outlook, which remain strong. We remain Constructive on Cloud Computing & AI.
Last week’s AI sell-off stemmed from the ‘neoclouds’ (data centre developers that build projects, then rent out capacity) who are funded largely via debt. Compared to hyperscalers, neoclouds are generally smaller, more indebted, and less diversified in product offering. Investors began to question neoclouds’ ability to keep funding the expansion, and shares took a hit. We view the issue as largely idiosyncratic to select neocloud names, with limited spillover effects. Due to their high leverage, their business case relies on continued fast growth to sustain commitments. Peers with lower debt levels (including hyperscalers) are more insulated from the funding squeeze, limiting any spillover, in our view. Importantly, the deterioration in credit sentiment for such companies does not impact their current operations or repayments but will influence the terms required once they tap the markets for the next issuance. Such doubts are not new, as AI sentiment has soured in pockets before: DeepSeek (not listed) in January 2025, US trade tariffs in April 2025, spending fears through last year, and this summer’s sell-offs in memory and chips, most recently on worries from rising competition from CXMT. Despite triggering bouts of volatility, data centre spending kept rising, adoption continued to accelerate, and the rally resumed. Last week’s data from early reporters supports this view. TSMC again beat its own revenue guidance and guided Q4 higher, and AI demand continues to outstrip capacity. Rental rates for processors remain strong, AI labs continue to grow sales at a fast pace, and – most importantly – adoption rates and investment plans continue to accelerate. The upcoming earnings season will tell us more, but for now, we see no signs of a slowdown across the AI ecosystem and we remain Constructive on Cloud Computing & AI.
