Markets Rotate Toward Safe Havens Amid Stagflation and Yield Divergence

Capital is rotating swiftly as stagflation fears, rising credit spreads, and diverging yields reshape global markets. Investors are exiting oil, copper, and EM-linked assets and reallocating into U.S. tech, Eurozone and Swiss equities, long-duration sovereign bonds, and SGD-resilient currencies like CHF, GBP, and JPY—while gold surges as the preferred hedge.

Key Points

• German, European, and emerging market equities exceeded early targets with the S&P 500 forecast to rise to 6,260 on EPS of USD 308 and a 20x P/E, while widening credit spreads, elevated Bund yields, tariff-driven volatility, copper demand weakness, and a sharply depreciating USD support rotation into U.S. tech, European, EM, and Swiss equities, and away from oil and copper-linked stocks.
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• US 10Y yields are forecast to fall to 3.8%, Bund yields to rise to 2.7%, US HY and EM spreads are widening to 316 and 365 bps respectively, Japan’s 30Y yield hit 3%, Eurozone growth is 0.9%, US long-end yields reached 5.15%, Fed cuts to 3.75–4.0% are expected, and investors favor U.S. Treasuries, Swiss bonds, short U.S. IG, EU IG, and Eurozone sovereigns.
  
  
• USD weakened on stagflation fears, with USDCHF falling to 0.83, EURUSD rising to 1.13, GBPUSD to 1.35, USDJPY to 144, and USDCNH to 7.19, while USD-SGD declined alongside Fed rate cut forecasts to 3.75%, EUR and GBP gained on high Bund and UK rates, JPY strengthened on BoJ policy, and CNY, EUR, CHF, and GBP offered diversification as EM FX risks rose.
  
  
• Gold, now at USD 3,317, outperformed on stagflation hedging, Fed cuts, and volatility, making it preferred for SGD investors via stable ETFs like GLD and SGLN, while oil (USD 58 forecast), copper (USD 9,200), and EM-linked commodities face demand, FX, and credit pressures.

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​Equity markets show strong YTD performance, led by the U.S., Europe, and EMs, while commodity-linked stocks lag amid macro uncertainty

Developed markets lead YTD with S&P 500 poised for further upside
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German equities have already recorded remarkable year-to-date performance, positioning Germany as a leader among developed markets despite broader volatility.
 
European and emerging market equities exceeded their January year-end targets within five months, delivering full-year gains in less than half the time.
 
The S&P 500 is forecast to reach 6,260 based on a 12-month forward EPS assumption of USD 308 and a P/E ratio of 20, up from its current level of 5,922.
 
Following the sharp rise in recession and stagflation risk after 2 April and the US-China 90-day grace period announcement, equity markets underwent sizeable adjustments.
 
Since then, the S&P 500 has tracked above the average path for post-correction recoveries in non-recession scenarios, underscoring market resilience and positive sentiment.
 
Credit tightening, yield divergence, and tariffs weigh on valuations

Credit spreads are forecast to widen amid slower growth, with US high yield spreads rising from an expected 280 basis points to 316 and projected to reach 420 basis points.
 
This reflects tighter liquidity and increasing corporate funding costs.
 
German Bund yields remain elevated at 2.7% due to fiscal expansion, tightening regional equity valuations and influencing capital allocation across Europe.
 
Markets have swung between extremes following the initial US tariff announcement and Germany’s fiscal reform, highlighting policy uncertainty and fiscal divergence as key volatility drivers.
 
Copper prices are expected to consolidate due to slowing global and Chinese demand, placing pressure on materials-sector equities.
 
Since 2 April, the US dollar has weakened sharply as markets priced in a stagflationary shock, creating FX-driven dislocations for exporters and multinational firms.
 
Large-cap U.S., European, and EM equities remain favored while commodity-linked stocks lag

The S&P 500’s projected rise to 6,260 is supported by strong earnings and valuation multiples, reinforcing opportunities in U.S. large-cap and technology sectors.
 
The Euro Stoxx 50 has already surpassed its full-year target by reaching 5,395, with ongoing regional fiscal expansion supporting further upside.
 
The MSCI Emerging Markets Index exceeded its projected year-end level of 1,140 by reaching 1,164 and is now forecast to climb to 1,220 over the next 12 months, helped by dollar weakness and liquidity inflows.
 
Swiss equities, with the SMI at 12,234 and a target of 12,780, benefit from dovish Swiss monetary policy and defensive sector strength.
 
UK equities, with the FTSE 100 at 8,775 versus a target of 8,860, are supported by GBP stability and disinflation trends.
 
Investors are advised to avoid overexposure to commodity-linked equities—particularly in energy and industrial metals—given the declining outlook for oil and copper prices driven by weak demand conditions.

​Diverging global bond yields and widening credit spreads create opportunities in long-duration sovereigns and high-quality corporate debt

Global yield divergence accelerates as U.S. softens and Japan tightens
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US 10-year Treasury yields are expected to decline from 4.47% to 3.8% over the next year, supporting capital gains in long-duration U.S. sovereigns.
 
German Bund yields are forecast to rise from 2.1% to 2.7%, reflecting sustained fiscal expansion and increasing duration risk.
 
Japanese 30-year government bond yields reached 3%—their highest since issuance began in 1999—signaling a historic shift in BoJ policy.
 
Credit spreads are forecast to widen globally.
 
U.S. high-yield spreads rose from 280 to 316 basis points and are projected to reach 420 bps.
 
European high-yield spreads are at 345 bps and investment-grade at 101 bps, both with upward bias.
 
Emerging market spreads are expected to increase from 330 to 365 bps amid rising capital outflow risk.
 
Fiscal risks, disinflation, and volatility shift global bond dynamics

The Eurozone’s subdued growth outlook—forecast at just 0.9%—weakens the carry appeal of its credit markets despite supportive ECB policy.
 
U.S. fiscal deterioration, highlighted by Moody’s downgrade and higher long-end yields reaching 5.15% in May, adds pressure to sovereign bonds.
 
The Fed is expected to reduce rates to 3.75%–4.0% by end-2025, which supports bond prices but compresses income potential.
 
Agency MBS are underperforming due to heightened rate volatility and extension risk.
 
Japan’s anticipated monetary tightening later in the year adds risk to yen-denominated bonds and amplifies global rate divergence.
 
Favor long U.S. Treasuries, Swiss bonds, and short-duration IG corporates

Long-duration U.S. Treasuries remain attractive for capital appreciation as yields decline.
 
Swiss government bonds offer defensive upside, particularly if the SNB cuts rates to negative.
 
Short-duration U.S. investment-grade corporates, with spreads forecast to widen from 89 to 120 bps, balance yield and credit risk with limited duration exposure.
 
European investment-grade bonds, projected to rise from 101 to 115 bps, are preferred over high-yield given heightened market volatility.
 
Select hard-currency EM bonds issued by commodity-rich and politically stable nations may offer favorable risk-adjusted returns.
 
Eurozone sovereign bonds—especially at the short end—stand to benefit from additional ECB rate cuts and easing inflation pressures.
 
Agency MBS warrant caution due to illiquidity and price sensitivity in volatile environments.

​Stagflation fears weaken USD and boost safe-haven and high-yield currencies, supporting SGD-relative FX strength and selective currency diversification

Major currencies gained against USD as stagflation fears drove FX moves

USD weakened sharply as markets priced in a stagflationary shock, reducing its strength relative to SGD and impacting USDSGD pair performance as risk aversion softened.
 
USDCHF declined from 0.91 in January to 0.83 in May.
 
EURUSD rose from 1.03 to 1.13.
 
GBPUSD climbed from 1.22 to 1.35.
 
USDJPY dropped from 157 to 144 with expectations of further decline to 140.
 
USDCNH fell from 7.35 to 7.19—indicating broad SGD-relative FX strength.
 
Gold’s surge to USD 3,317/oz reinforces persistent FX volatility and inflation hedging, supporting flows into currencies like CHF and JPY.
 
Monetary policy divergence and commodity exposure shape FX outlook

The Fed funds rate is forecast to decline from 4.5% to 3.75% by end-2025, narrowing the yield differential with SGD and weakening the USDSGD pair.
 
Germany’s 2.7% Bund yield and the UK’s revised 3.5% terminal rate support euro and sterling strength relative to SGD.
 
The yen outperforms amid BoJ normalization and rising JGB yields.
 
Weak oil prices (forecast at USD 58) weigh on AUD performance against SGD.
 
The ECB’s dovish stance, with 2026 inflation projected at 1.6%, may cap EUR upside unless MAS turns more hawkish.
 
JPY, GBP, CNY, EUR, and CHF favored for resilience and diversification

JPY is forecast to strengthen from 144 to 140 per USD, supported by safe-haven demand and BoJ tightening, offering FX resilience for SGD investors.
 
GBP remains elevated at 1.35 on the back of a hawkish BoE, enhancing the appeal of GBP-denominated assets.
 
The Chinese yuan stabilizes near 7.20, improving CNYSGD prospects for regional exposure.
 
The euro is projected to hold around 1.15, benefiting from eurozone fiscal expansion and rate normalization.
 
The franc's appreciation to 0.83 reflects its strength as a hedge currency amid global volatility.
 
Meanwhile, emerging market currencies remain under pressure from rising credit spreads and are less favorable for SGD-based portfolios.
 

​Gold outperforms on safe-haven demand while oil and copper weaken on poor fundamentals, shifting commodity strategy toward defensive plays

Gold surges past expectations while oil and copper falter amid macro headwinds

Gold reached USD 3,317/oz by May 2025, surpassing its original forecast of USD 2,900. This reflects heightened global demand and strong portfolio insurance appeal amid stagflation fears.
 
In contrast, oil prices fell to USD 64 and are forecast to decline further to USD 58. This underscores persistent demand weakness that outweighs OPEC+ supply interventions.
 
Copper peaked at USD 9,600 but is expected to retrace to USD 9,200. This indicates plateauing momentum driven by industrial slowdown, especially in China.
 
Broad macro volatility, a weakening USD, and slowing global capex flows have shifted investor preference away from cyclical commodities toward gold.
 
Commodity Pressure Factors: Weaker demand, trade friction, and yield compression fuel safe-haven flows

Gold demand rose sharply as U.S. trade policy disruptions slowed corporate capex and altered export dynamics. This weakened demand for industrial metals while elevating gold’s hedge appeal.
 
Fed rate cuts, lower real yields, and rising bond market volatility have increased gold’s attractiveness relative to energy and industrial commodities.
 
Meanwhile, oil remains under pressure from poor demand fundamentals, and copper demand is constrained by stagnant global infrastructure investment.
 
Emerging market supply chains face FX and liquidity stress as EM credit spreads widen to 365 bps. This further reduces commodity attractiveness.
 
The MAS’s stable policy stance, alongside a weaker USD and CNY, supports SGD’s purchasing power. This makes gold imports more favorable for SGD-based investors.
 
Gold Investment Picks: SGD-based portfolios shift to gold ETFs and away from EM-linked commodities

Gold’s outperformance positions it as a top pick for SGD-denominated investors. SPDR Gold Shares (GLD), iShares Physical Gold ETC (SGLN), and SGD-hedged gold mutual funds are preferred vehicles.
 
The franc and yen—both correlated with gold’s safe-haven behavior—can enhance FX diversification in commodity-linked portfolios.
 
Meanwhile, oil’s decline to USD 58 and copper’s revision to USD 9,200 limit upside for commodities linked to EM production. Widening credit spreads and currency volatility pose additional risks.
 
For investors prioritizing resilience and risk-adjusted returns, gold offers superior performance over energy and industrial metals in current macro conditions.