Falling Yields Accelerate Global Rotation Amid Fiscal Repricing

Falling US earnings projections, rising sovereign yields, and a softening dollar are driving a major global asset rotation, as investors reduce exposure to overvalued US tech and reallocate into service-led equities in Europe and Japan, EM local currency bonds yielding over 5.9%, and defensive assets like gold, amid elevated inflation, fiscal expansion, and geopolitical risks.

Key Points

• Capital is rotating out of overvalued US tech stocks into international and service-led markets, as Europe and Japan equities outperform US large caps amid falling US earnings projections, tech volatility from rising rates and input costs, emerging market growth constraints due to weak infrastructure, and investor reallocation toward undervalued regions like China, Korea, and Asia ex-Japan to diversify and reduce USD exposure.
  
  
• Rising US and German sovereign yields, driven by fiscal expansion and short-term debt issuance, are supporting demand for investment-grade and EM local currency bonds despite bond market volatility from 2.7 percent US core PCE inflation, fiscal deficits, and geopolitical risks, as investors rotate into short-duration, floating-rate, and sovereign instruments—particularly EM bonds yielding over 5.9 percent in Asia—while SGD-based portfolios hedge reinvestment and currency risks using swaps and overlays.
  
  
• The US dollar's decline to a three-year low amid rising deficits and expected Fed rate cuts is driving FX positioning into EUR, GBP, and JPY due to yield differentials and risk aversion, while diverging central bank policies, inflation volatility, and capital outflows pressure EMFX despite 5.9 percent real yields, prompting SGD-based investors to hedge USD risk and rotate into Asia FX and EM local assets.
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• Gold is projected to rise to 3,920 US dollars on safe-haven demand while oil falls to 56 due to oversupply, with geopolitical risk, tariffs, and EM constraints curbing commodity investment and driving investors toward gold and EM local bonds for inflation protection and yield, supported by a weaker USD and hedging strategies in SGD portfolios.

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​Global Equity Rotation Accelerates Amid Policy Shifts and Valuation Gaps

Capital Rotation into Undervalued, Service-Led Tech Markets

Global tech equity performance is being driven by valuation gaps, with international markets like Europe and Japan outperforming the US due to lower P/E ratios, stronger dividend yields, and a shift in investor preference away from overstretched US valuations.

Digital regulation, tariffs, and fiscal policy—such as US tax cuts and EU defense spending—are shaping tech sector profitability, with public support in markets like Germany, South Korea, and China reinforcing investment into R&D and consumer tech.

Capital is rotating from hardware and overvalued growth segments into service-heavy, dividend-yielding tech models, while global investors reallocate toward underowned markets like Korea and China with policy-driven tailwinds.

Rising Volatility from Rates, Shocks, and Constraints

Tech sector volatility is rising due to interest rate sensitivity, elevated valuations, trade policy shocks, and rising capex burdens in hardware and semiconductors, with earnings downgrades and geopolitical instability weighing on sentiment.

EM equity growth is limited by funding gaps, weak infrastructure, and local currency mismatches, particularly in China’s real estate-linked tech sectors and Southeast Asia’s supply chains, despite some improvements in fiscal positions.

Diversification Toward Thematic and Regional Equity Strategies

Investors are reducing concentrated US equity exposure and reallocating toward undervalued regions like Europe, Japan, and Korea, with dividend-paying and defense-linked equities gaining favor due to their stability and earnings visibility.

Long-term investment themes include AI, healthcare, high-dividend stocks, and natural resources, while tactical plays such as autos and global small caps benefit from fiscal support, re-rating potential, and diversification gains.

SGD investors are advised to diversify into Asia ex-Japan equities and high-income strategies to hedge USD exposure, manage volatility, and improve returns, while being cautious in thin EM markets with low liquidity and concentrated risks.

​Global Bond Repricing Accelerates on Fiscal Risk and Inflation Shocks

Rising Yields Drive Demand for Short-Duration Bonds

Bond yields are rising globally due to fiscal pressures and inflation concerns, with US and German 10-year yields expected to reach 4.5 percent and 3.0 percent respectively; investment-grade corporate bonds remain attractive for their strong fundamentals and high yields, while EM local currency bonds are drawing inflows amid USD weakness.

Fiscal expansion, tariff-driven inflation, and monetary policy shifts are steepening yield curves and increasing bond market volatility, prompting investors to manage duration risk more actively as rate cut expectations and conflicting central bank signals shape market movements.

Investors are favoring short-duration, floating-rate, and high-quality investment-grade bonds for stability and income, while reallocating away from tight-spread developed market credit into sovereigns, EM debt, and liquid alternatives to manage volatility.

Inflation and Geopolitical Risks Elevate Bond Market Volatility

Rising core inflation, expanding fiscal deficits, and geopolitical risks such as tariffs and energy shocks are driving bond yield volatility, with markets pricing in 52 basis points of US rate cuts by year-end amid uncertainty around future inflation dynamics.

Structural credit risks, currency depreciation, and weak investor diversity are undermining EM bond stability, with China’s property sector stress, limited fiscal space, and thin market liquidity heightening volatility and deterring sustained capital inflows.

Rotation Into EM Debt and Hedging Strategies

Investors are increasing exposure to short-duration and floating-rate bonds while selectively extending into government debt during risk-off periods, reallocating away from developed market IG credit toward EM local currency debt and alternatives for yield and diversification.

Long-term value is emerging in intermediate bonds, green bonds, and EM debt, while US short-duration and euro sovereigns offer near-term entry points; strong fundamentals support IG corporates, and rate normalization improves prospects for inflation-linked bonds.

SGD investors are advised to diversify from USD assets into Asia-focused bonds and EM currencies, use FX hedging and interest rate swaps to manage volatility, and incorporate liquid alternatives and regional credit exposure to enhance portfolio resilience.

​Global FX Realignment Driven by USD Repricing and Policy Divergence

USD Weakness Drives Rotation into Appreciating Currencies

The USD index has fallen to a three-year low due to fiscal deficits and expected Fed rate cuts, prompting capital outflows into non-USD assets. EUR/USD is forecast to rise from 1.17 to 1.25, GBP/USD from 1.37 to 1.44, and USD/JPY to fall from 145 to 138. Regional currencies tied to China are also gaining as global capital reallocates toward appreciating FX.

Markets expect 52bps of US rate cuts by year-end and a 3.1 percent terminal rate by 2026, weakening the USD. Bund and JGB yields are rising to 3.0 percent and 1.8 percent respectively, boosting EUR and JPY. Fiscal stimulus in Europe and US tariff hikes are adding inflation risk, while diverging Fed signals and trade progress drive FX volatility and positioning shifts.

JPY strengthens in risk-off conditions driven by geopolitical or energy shocks, while EM currencies weaken from capital flight. Risk-on regimes benefit EUR and Asia FX from inflows and USD softness, though excessive euro gains raise ECB concerns. Inflation-sensitive FX like GBP and AUD react strongly to CPI surprises, and policy divergence intensifies currency dispersion.

Yield Shifts and EM Fragility Heighten FX Volatility

US, German, and Japanese yields are forecast to rise, supporting EUR and JPY versus USD. US inflation at 2.7 percent and tariff-induced shocks heighten FX volatility. Geopolitical tensions like US-Japan trade threats and diverging central bank responses further complicate USD stability and drive directional shifts in major pairs.

China’s housing sector stress and limited fiscal space in EMs increase depreciation risks and outflow pressure. Weak EM monetary support, external debt exposure, and low bond market diversity raise FX fragility. High real yields (e.g., 5.9 percent in LCY bonds) attract inflows, but these are vulnerable to reversals on inflation or rate shifts.

Long EUR, GBP, JPY Trades with SGD Hedging Strategy

The base case favors short-USD trades, including long EUR/USD and GBP/USD and short USD/JPY. European fiscal expansion and Japanese monetary divergence support these trades. Asia FX is favored via long KRW, SGD, and local currency bonds. Near-term consolidation in EUR/USD is likely, while regional exporters benefit from trade diversification away from China.

Long EUR/USD, GBP/USD, and short USD/JPY remain attractive due to rate differentials and safe-haven flows. JPY and CHF may appreciate in risk-off scenarios, while policy divergence supports MXN and INR. Trade resolution lifts GBP, CNY, and VND, though trade threats targeting Japan introduce short-term JPY downside.

SGD-based investors should hedge USD risk using forwards or swaps, especially amid weakening USD. Diversification into Asia FX and EM bonds enhances returns and reduces correlation with developed markets. Liquid alternatives and currency overlays provide additional protection, while interest rate swaps help manage duration risk in short-term USD or EUR exposures.

​Geopolitics and Inflation Reshape Global Commodity Investment Strategies

Gold Rises, Oil Falls on Macro Divergence

Brent crude is projected to fall from USD 67.8 to USD 56 due to weakening demand and oversupply, while gold is expected to rise from USD 3,273 to USD 3,920 amid safe-haven demand and inflation hedging. Crude oil remains rangebound with geopolitical risk premiums driving short-term spikes, whereas gold’s narrow trading band reflects cautious positioning in response to macro uncertainty.

US tariff hikes and fiscal spending are inflating input costs and disrupting commodity supply chains, particularly in raw materials and strategic sectors. While subsidy cuts may reduce renewable investment, defense-related fiscal expansion in Germany and new trade deals are driving long-term capital flows into industrial and energy-linked commodities.

Gold is set to rise by 19.8 percent as a defensive hedge, while oil is expected to decline by 17.4 percent due to cyclical growth exposure and supply imbalances. Strong manufacturing activity benefits industrial metals like copper, but gold maintains more consistent demand as an inflation and volatility buffer.

Inflation and EM Constraints Drive Commodity Volatility

Oil prices reflect a USD 12 geopolitical premium, while rising tariffs and supply shocks add inflationary volatility across commodities. Core US inflation has reached 2.7 percent, and shifting interest rate expectations are increasing uncertainty in rate-sensitive assets like gold and oil, amplified by USD weakness and EUR strength.

China’s real estate crisis and limited fiscal flexibility across EMs are reducing demand and infrastructure funding for commodity production and exports. Tariffs, capital flow risks, and supply chain shifts are complicating EM trade logistics, though finalized trade deals with key partners offer some stabilization for export-driven investment.

Hedging and Rotation into Gold, EM Assets

Investors are rotating into gold and liquid alternatives while underweighting oil due to oversupply, with tactical long-short strategies exploiting macro-driven price ranges. A 4.3 percent YTD drop in broad commodities, down from an 11.4 percent gain last year, reflects shifting positioning toward cyclical assets and EM-linked exposures.

Gold is forecast to rise to USD 3,920, while infrastructure and defense spending in Europe supports demand for industrial metals. Oil remains sensitive to geopolitical premiums, and a weak USD is bolstering global demand for dollar-denominated commodities like gold and energy.

SGD-based investors are encouraged to hedge USD commodity exposures through currency overlays and diversify into EM Asia bonds. Liquid alternatives and short-term contracts help manage stagflation risk and rate uncertainty, while futures and options offer protection against illiquidity and price volatility in EM-linked commodity assets.