Fidelity Bets on Midcaps as Tariff Turbulence Eases

Economic

Summary:

Fidelity International is increasing its exposure to midcap equities in Japan, Germany, and China, citing a fading impact from U.S. tariff threats and rising domestic resilience across these economies....

Strategic Shift Toward Midcaps After Trade Tensions Ease

Fidelity International has repositioned its multi-asset strategy to emphasize midcap equities, particularly in Japan, Germany, and China. According to portfolio manager George Efstathopoulos, the fund's current allocation to midcaps from these three economies now accounts for approximately 11% of its growth and income portfolio — a sharp contrast from the near-absence of such positions 18 months earlier. This transition signals a recalibration of market expectations now that the most disruptive phase of tariff-driven volatility may have passed.

The decision to scale into midcap assets followed what Efstathopoulos described as “Liberation Day” — the market panic that erupted on April 2 after a fresh wave of U.S. tariff threats. That date marked the nadir of equity sentiment, prompting a near-term capitulation that Fidelity interpreted as a signal of bottoming risk. Since then, key midcap indexes have rebounded: Japan’s MSCI Mid Cap Index is up over 4%, Germany’s DAX Mid-Cap Index has gained nearly 6%, and Chinese midcaps have edged up by about 0.5%. These returns suggest a recovery narrative taking hold, despite looming geopolitical and trade uncertainties.

Domestic Growth as a Buffer Against Global Shocks

A key rationale behind Fidelity's preference for midcaps is their reduced sensitivity to global trade friction and stronger ties to domestic consumption. This approach is particularly pronounced in Germany, where mid-sized firms are seen as direct beneficiaries of a historic pivot toward fiscal expansion. In contrast to traditional export-heavy giants, German midcaps now appear positioned to capture a more internally driven recovery cycle, aided by new government spending initiatives announced earlier this year.

In Japan, Fidelity views current macro conditions as indicative of a structural transformation. With moderate and sustainable inflation finally taking root — what Efstathopoulos calls “good inflation” — the economy is showing signs of healthier consumer activity. Midcaps, often more flexible and domestically oriented than their large-cap counterparts, are expected to outperform in this environment.

China, meanwhile, remains attractive due to ongoing prospects for fiscal stimulus and the implicit support of state-backed institutions. Although performance has lagged relative to Japan and Germany, the perception of downside insulation — including government intervention during market dips — underpins continued exposure. Fidelity sees limited risk of severe drawdowns, making Chinese midcaps a component of a broader strategy to balance growth potential with managed volatility.

Performance and Portfolio Positioning

The broader strategy, managed from Singapore and part of Fidelity’s global multi-asset fund, has returned nearly 14.8% over three years in U.S. dollar terms. The firm’s confidence in its midcap exposure reflects a forward-looking view that blends policy analysis, domestic economic shifts, and recalibrated global trade dynamics. With the 90-day tariff truce set to expire on July 8, Fidelity’s positioning suggests a belief that either a negotiated extension or domestic resilience will mitigate further downside risks.

Fidelity’s pivot toward midcap equities in Germany, Japan, and China is grounded in the view that recent tariff-induced volatility has peaked and that domestic economic shifts are reshaping the risk-reward profile of smaller firms. By focusing on companies with stronger internal demand links, the strategy aims to reduce exposure to global trade fragmentation while maintaining exposure to growth through targeted regional bets. As geopolitical tensions and trade policy timelines unfold, this allocation signals a conviction in structural resilience over cyclical speculation.

Source: Reuters

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Economic

Stalled Progress Despite Diplomatic Engagements

Japan’s chief trade negotiator, Ryosei Akazawa, confirmed in a recent press conference that the trade dialogue with the United States is still shrouded in uncertainty. Despite ongoing efforts from both sides, no agreement has been reached to eliminate the 25% tariff imposed on Japanese cars or the 24% reciprocal tariff on U.S. goods, which remains suspended until July 9. Akazawa noted that while this date holds importance, it does not serve as a fixed deadline for concluding negotiations.

The lack of a breakthrough is compounded by Japan's domestic political timeline. With the upper house election scheduled for July 20, political analysts argue that Prime Minister Shigeru Ishiba is constrained in offering compromises—particularly in sectors like agriculture that remain politically sensitive. The alignment of trade talks with the electoral calendar complicates any potential for meaningful concessions, as pre-election periods typically heighten political caution and resistance to controversial decisions.

Economic Ramifications and Sectoral Vulnerability

The ongoing tariff dispute is already impacting Japan’s economy. Export data from May reveal the first year-on-year decline in eight months, primarily driven by diminished overseas demand for automobiles. Major manufacturers such as Toyota are directly affected by the tariffs, contributing to a broader downturn in trade figures. While the timing of these developments may not point to a single direct influence, the correlation between heightened tariff pressure and export contraction suggests that prolonged trade friction is undermining Japan’s economic resilience, especially given its export-oriented structure.

Akazawa’s repeated use of the term "fog" underscores the lack of visibility in forecasting a resolution. While ministerial-level talks are ongoing, the absence of clear strategic concessions or timelines from either side raises the possibility that negotiations may persist well beyond July. The uncertainty risks not only delaying tariff relief but also exacerbating investor anxiety, supply chain disruption, and industrial stagnation—factors that may deepen vulnerabilities in Japan’s already cautious economic recovery.

The Japan–US trade standoff illustrates how diplomatic gridlock, domestic politics, and sectoral exposure can interact to constrain economic performance. While the current impasse may not yet signify a collapse in relations, the continued lack of clarity poses risks to both trade-dependent industries and broader macroeconomic stability. As July approaches, attention will center on whether negotiators can pivot from ambiguity to actionable outcomes.

Source: Reuters

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Isaac Bennett

Russia-Ukraine Conflict

At least 14 people were injured when Russian drones attacked the Ukrainian Black Sea city of Odesa overnight, damaging high-rise buildings and railway infrastructure, local authorities said on Friday.

Odesa is Ukraine's largest Black Sea port, key for imports and exports, and has been under constant missile and drone attacks by Russia since the war began.

"Despite the active work of air defence forces, there is damage to civilian infrastructure, including residential buildings, a higher education institution, a gas pipeline and private cars," local governor Oleh Kiper said on Telegram messenger.

Kiper released photos of burning houses and charred high-rise buildings.

Local emergencies service said that during the attack there were at least 10 drone strikes on residential buildings, causing massive fires.

Ukraine's air force said on Friday that Russia had launched 86 drones on Ukraine overnight.

The military noted its air defence units shot down 34 drones while another 36 drones were lost - in reference to the Ukrainian military using electronic warfare to redirect them - or they were drone simulators that did not carry warheads.

However, the military reported that drones hit 8 locations.

Ukrainian state railways Ukrzaliznytsia reported that Odesa railway station was damaged during the attack, with power wires and rails damaged.

Russian drones also attacked Kharkiv in northeastern Ukraine overnight, damaging several private and multi-storey houses, Kharkiv officials said.

Source: Reuters

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Economic

Oil Prices Rise Amid Geopolitical Uncertainty

U.S. benchmark crude oil increased by 15 cents to $73.65 per barrel, while Brent crude rose by 19 cents to $76.89 per barrel. These gains reflect ongoing market concerns about the escalating Israel-Iran conflict, with investors wary of disruptions to oil production and shipping routes. Iran, a major oil producer, controls the Strait of Hormuz, through which a significant portion of the world’s oil passes. As a result, any military escalation in the region could lead to higher oil prices and supply disruptions.

The White House’s statement that President Donald Trump would decide within the next two weeks on whether the U.S. would join Israel in its military actions added to the uncertainty. While Trump has indicated that he still views diplomacy as an option, the geopolitical risk is enough to fuel concerns in global markets, especially in the oil sector. Additionally, Trump's tariff agenda continues to be a major factor impacting market sentiment.

Mixed Performance in Asian Markets

Asian stock markets showed mixed results on Friday as traders reacted to geopolitical concerns and economic data. Japan’s Nikkei 225 index gained 0.1% to close at 38,538.14, buoyed by news that Japan’s core inflation rate had risen to 3.7% in May. This increase in inflation adds to the challenges faced by Prime Minister Shigeru Ishiba's government and the Bank of Japan, which is already dealing with the impact of U.S. trade policies.

In Hong Kong, the Hang Seng index jumped 1.2% to 23,504.59, while China’s Shanghai Composite gained 0.1%, reversing earlier losses to close at 3,364.83. These gains came after the People’s Bank of China kept its 1-year and 5-year loan prime rates unchanged, as widely expected. Meanwhile, Australia’s S&P/ASX 200 slipped 0.3% to 8,500.40, and South Korea’s Kospi climbed 1.2% to 3,014.05.

Global Economic Concerns and Central Bank Responses

The geopolitical tensions between Israel and Iran have contributed to cautious risk sentiment across markets. In response to these risks, the Bank of England held its main interest rate steady at 4.25%, citing concerns about the potential escalation of the Israel-Iran conflict. The central bank expressed caution about the broader economic impacts of the situation, which remains a key factor influencing global market movements.

In currency markets, the U.S. dollar weakened slightly against the Japanese yen, slipping to 145.28 yen from 145.46 yen. The euro, on the other hand, rose to $1.1530 from $1.1498. These movements reflect the broader market uncertainty driven by geopolitical developments and ongoing trade concerns.

The combination of rising oil prices and mixed Asian stock market performance highlights the cautious sentiment in global financial markets as investors await further developments on the Israel-Iran conflict and the potential involvement of the U.S. With inflationary concerns in Japan and continued geopolitical risks, markets are likely to remain volatile in the short term, with oil prices remaining a key indicator of global market stability.

Source: AP

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Economic

Commodity

Impact of Export Restrictions and Cautious Customs Process

In early April, China announced export restrictions on seven medium-to-heavy rare earth products, including certain types of magnets. As the world’s largest producer, responsible for over 90% of global rare earth magnet supply, China’s move has severely impacted sectors such as automotive, aerospace, semiconductors, and military equipment. Industry sources revealed that Chinese customs officials have become more cautious in processing rare earth shipments, particularly magnets, due to the lack of clarity in classification codes for various types of rare earth products.

While Beijing has promised to expedite the approval process for export licenses following an agreement with the U.S. to ease trade tensions, the immediate effect has been a slowdown in exports. In May, China exported only 1,238 metric tons of rare earth permanent magnets, a 52.9% decrease from April and the lowest single-month figure since February 2020. This represents a year-on-year decline of 74%, highlighting the impact of the new restrictions.

Ongoing Confusion and Delays in Export Licenses

The confusion surrounding the application of export curbs has led to delays in the processing of some shipments, particularly lower-performance rare earth magnets used in consumer electronics and appliances. While some companies, such as JL MAG Rare-Earth and Innuovo Technology, have secured export licenses for specific clients, the overall uncertainty continues to weigh on the industry.

In the first five months of 2025, exports of rare earth magnets totaled 19,132 tons, a 14.5% decrease from the same period last year. This marks the lowest export volume for this period since 2021, further emphasizing the negative impact of the export curbs on global supply chains.

China’s decision to impose stricter controls on rare earth exports, including magnets, has created significant challenges for industries worldwide. With reduced shipments and ongoing confusion about the application of the curbs, the global supply of rare earth materials is under pressure. As China moves to streamline its export licensing process, it remains to be seen how quickly the situation will stabilize and whether supply chains can recover in the face of these challenges.

Source: reuters

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Economic

Surge in Trading Activity and Talent Acquisition

India's rapidly growing derivatives market, which accounted for nearly 60% of global equity derivative trading volumes in April, is attracting significant interest from Western trading giants. According to the Futures Industry Association, India’s notional turnover of equity derivatives has surged 48 times since 2018, positioning the country as a key player in global trading. Citadel Securities and other firms have ramped up their operations in India, with Citadel’s market-making efforts in India being supported by increased capital allocation and a growing talent pool.

IMC Trading, a global high-speed trading firm, plans to increase its workforce by more than 50% by the end of 2026, reaching over 150 employees in India. This is part of a broader trend where global firms are actively recruiting talent from India’s top universities and competing for skilled professionals from local trading firms.

India’s Role as a Hub for Global Trading Firms

The entry of global trading firms into India is spurred by the growing domestic consumer base, which offers stability amid global economic uncertainties. In addition to the rising demand for trading talent, these firms are also seeking technological expertise to support their operations. India’s prestigious engineering institutions, particularly the Indian Institutes of Technology (IITs), have become the primary source of recruitment for these firms. As competition intensifies, salaries for junior traders and software engineers have doubled compared to three years ago, reflecting the high demand for skilled professionals.

Exchange Upgrades to Support Increased Activity

The influx of global trading firms has prompted India’s two main exchanges—the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE)—to upgrade their technological infrastructure to accommodate the demands of high-frequency trading. The NSE plans to add 2,000 co-location racks over the next two years, which will significantly reduce trade execution times. Meanwhile, the BSE aims to scale up to 500 co-location racks by the end of fiscal 2026. These technological upgrades are essential for keeping pace with the increasing volume of trades driven by global firms.

Investment in Technology and Market Growth

The BSE has already invested between 4.5 billion and 5 billion rupees ($52 million to $58 million) in technology over the past two years to improve its trading systems. Sundararaman Ramamurthy, BSE’s CEO, emphasized that the exchange must provide additional value to meet the demand from high-frequency and quantitative trading firms, which are pushing for faster execution speeds. These improvements are critical for maintaining India’s competitive edge in the global derivatives market.

The increasing presence of global trading firms in India is reshaping the country’s financial markets, driving both talent acquisition and technological innovation. As India’s derivatives market continues to expand, the country is positioning itself as a key hub for global trading activity. The ongoing upgrades to the NSE and BSE’s infrastructure, coupled with the rising demand for skilled professionals, are likely to further boost India’s prominence in global trading over the coming years.

Source: Reuters

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Economic

Bond

Reducing Super-Long Bond Issuance to Stabilize the Market

The Japanese Finance Ministry is set to propose cutting the issuance of 20-, 30-, and 40-year bonds by ¥100 billion ($690 million) per auction, effective through March 2026. The meeting, scheduled for 4 p.m. in Tokyo, will involve discussions with primary dealers to seek feedback on the proposed reductions. The move comes in response to a significant rise in yields on super-long bonds since April, which has caused turbulence in the bond market and spilled over into global financial markets. The ministry plans to offset these reductions by increasing the issuance of 2-year and shorter-dated bonds.

The proposal for a ¥300 billion reduction in the combined issuance of super-long-term bonds per auction is seen by market participants as essential to restoring balance in the market. If the reduction is smaller than expected, investors fear it could lead to a selloff and further spikes in yields. Analysts like Naoya Hasegawa of Okasan Securities believe that a ¥100 billion cut per bond maturity, along with similar reductions in liquidity enhancement auctions, would help avoid disappointing the market.

Recent bond sales have shown strong demand for intermediate-term notes, which helped push yields down in Tokyo’s bond market. However, the market remains on edge, awaiting confirmation of the proposed adjustments and the potential for further policy actions. The recent spike in yields has been attributed to the Bank of Japan's reduced purchases of government bonds, after it scaled back its quantitative easing program.

Challenges in the Bond Market and the BOJ’s Role

The rise in bond yields has been exacerbated by the Bank of Japan's withdrawal from the bond market, which had previously been a major buyer of government debt. Since last summer, the BOJ has significantly reduced its bond purchases, leaving a gap in demand that has not been filled by private-sector banks and life insurers. This gap has contributed to volatility in the bond market, with yields spiking, especially on longer-term bonds.

To mitigate this issue, the BOJ has announced it will slow its bond market withdrawal starting in April 2026, reducing its quarterly bond purchases from ¥400 billion to ¥200 billion. This move is expected to provide some support for bond prices and demand over the longer term.

Japan’s Fiscal Challenges and Bond Market Outlook

Japan remains heavily reliant on bond issuance to finance its government spending, which has been a cause for concern due to its high debt-to-GDP ratio of 232.7%. This ratio remains the highest among developed economies, and as a result, Japan faces significant fiscal challenges. Debt-servicing costs for the country account for a substantial portion of the 2025 fiscal budget, further increasing vulnerabilities to rising yields.

The Finance Ministry is also facing political pressure ahead of Japan's national election in July. Proposals by political parties, including cash handouts and a reduction in the national sales tax, could lead to higher government spending, which may require additional bond issuance. These political measures are contributing to the broader concerns about fiscal sustainability and the stability of the JGB market.

The Japanese Finance Ministry’s proposed adjustments to its bond issuance plan reflect its efforts to stabilize the bond market amid rising yields and increased market volatility. The success of these adjustments will depend on restoring balance in supply and demand, especially as the Bank of Japan continues to taper its bond purchases. Investors will be closely watching the ministry’s discussions with primary dealers for further clarity on these plans, as Japan’s high debt levels and fiscal challenges continue to pose risks to the stability of the government bond market.