Macroeconomic overview

While the synchronised global expansion is over, global growth remains robust, mainly thanks to a still-buoyant US economy. Indeed, the US economy is set to grow at its fastest pace since 2005. Further out, we might start to see question marks about the impact from tariffs and Fed hikes, but that is unlikely until some time in 2019. Encouragingly, European data has shown an uptick from a slower start to the year, with PMIs still well in expansion territory and German growth holding up thanks to consumption and investment. Overall, we are not worried about a downturn for the time being.

Trade tensions are unlikely to abate anytime soon, as China and the US were unable to come to an agreement at their latest talks. The US imposed tariffs on another USD16 billion of Chinese goods, to which China immediately retaliated. The US has threatened more, which China has said it would match as well. On the other hand, the US & Mexico have come to an agreement for NAFTA, and tensions between the US and Europe have abated – but China remains the big fish for the US. Ahead of the midterm elections, an amelioration with allies and a tough stance towards China is likely to play well with the electorate, which implies tensions will persist for now. In terms of consequences, they appear relatively muted in the US, less so in China, but it might still be too early to tell what sort of impact one can expect – inflationary (because of higher prices) or deflationary (because of slower growth) – and how big.

In positive European news, eight years and USD330 billion in loans later, Greece is finally done with its massive bailouts. Of course, work still remains, but Greece should see access to the markets restored. But, calm in the Eurozone is unlikely, as Italian budget negotiations get underway with risks that the likely shift from a primary surplus to a primary deficit scares markets. Indeed, there is significant uncertainty around the fiscal outlook, and a more confrontational relationship with the EU isn’t helpful.

The latest Fed minutes showed that policymakers are willing to raise rates again, so long as the U.S. economy remains healthy. The September hike is firmly priced in, and expectations for a December hike are above 60%. Beyond that, the outlook could become more uncertain, though the market expects 2 more hikes in 2019. Fed Chairman Jerome Powell also spoke in Jackson Hole, with his comments perceived as more dovish than anticipated, as he mentioned more attention to data and less on rules, implying the path of rate hikes isn’t set in stone.

The US dollar remains supported by stronger growth and interest rate differentials, a trend we expect to persist. The euro has retreated in recent months, and given a number of headwinds for the old continent, we do not expect a sharp rebound for now – it should stay around 1.15 to 1.20. Concern about EM currencies has grown in light of the Turkish Lira depreciation, but we see little risk of contagion, and see more risk in countries with idiosyncratic stories like Turkey, Argentina, Russia and Brazil. Nonetheless, with slower Chinese growth, a stronger USD and higher rates, caution is warranted as investor sentiment towards emerging markets could remain challenged.