Global Market Perspective - Q4 2018

The trade war between the US and China intensified in the third quarter with both sides announcing a second round of tariffs. So far the market response has been a striking divergence between the US and Chinese bourses with the S&P 500 powering ahead whilst the MSCI China has slumped. Clearly, investors see the advantage to the US and we discuss the trade wars in more detail in the strategy note.

US outperformance also owes something to the cyclical picture with the economy rebounding strongly whilst the rest of the world generally disappointed on the growth front. Our downgrade to global growth in August was led by cuts to our forecasts for Europe and Japan. We also trimmed our emerging market forecasts in response to the slowdown in China and the likely escalation of the trade conflict with the US.

Meanwhile, the US Federal Reserve continued to tighten monetary policy as the economy strengthened and inflation picked up. Tighter liquidity impacted emerging market currencies and bonds with those countries with significant external borrowing requirements experiencing extreme volatility. However, increased volatility was not confined to the emerging markets as Italian bond spreads widened sharply following the budget announcement from the new government in Rome. We look at the debt dynamics of the eurozone’s third largest economy and also look ahead and consider the message from the yield curve and how markets have reacted to an inversion in the curve which we believe will become more of a focus in 2019.

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Global Market Perspective - Q4 2018 29 pagina’s | 704 kb