Perspective

Economic and Strategy Viewpoint - May 2019


Are stock markets heading for a melt-up?

  • With equity markets strengthening and the Federal Reserve on hold there is talk of a surge, or melt-up in markets. Signs of economic recovery, low inflation and easier central bank policy in Europe and Asia reinforce the Goldilocks narrative.
  • Macro headwinds such as excess inventory, higher oil prices and a potential squeeze on profit margins threaten to check equity markets. These risks may materialise, but the lesson from history is that a melt-up can happen precisely because it is driven by sentiment rather than macro.

UK: growth built on sand

  • Despite concerns over the impact of Brexit uncertainty, UK economic growth is likely to have picked up markedly over the first quarter of the year. The UK manufacturing sector appears to be buoyant again, although the headline figures are not what they seem.
  • Huge stockpiling appears to have taken place in the run-up to the March Brexit deadline. While this has boosted output of late, growth is highly likely to slow in coming months as excess inventories are wound down. Therefore, it may be premature to celebrate the likely improvement in near-term growth.

Quarantining Turkey and Argentina

  • Turkey and Argentina face some serious problems. Luckily, we do not see a likelihood of contagion for the rest of the emerging markets.

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