The year 2018 is duly fulfilling its promise to be more volatile and less of a one-way road towards synchronised growth than 2017. However, a differentiated view of seemingly contradicting market trends underway offers glimpses of opportunities ahead.
1. U.S. equities have suffered this week like virtually all other markets, but underlying data remain broadly constructive.
Investor sentiment has turned very negative very suddenly for much of this week, understandably irritated by the currency crisis in Turkey, which came on the heels of growing unease about the ongoing trade dispute. However, in most developed and even in many emerging markets, the data on the ground paint a more constructive picture. To put things into perspective there is no better start than to look at the United States, where the S&P 500 stock index has rallied by 11% since the beginning of April, leaving it within 2% of our 12-month target, as we show on page 2. Strong corporate earnings in Q2 and buoyant retail sales in July are but the latest drivers of this upswing. On the other hand, risks have not disappeared from the horizon. Emerging currency turbulences aside, the United States face challenges of their own in the context of the upcoming midterm elections, the trade dispute and geopolitical unrest.
2. In the Eurozone, unlike the U.S., the currency has lost value alongside the decline in equity markets. But economic data are encouraging.
The Eurozone equally has much to appease nervous investors with broadly solid macroeconomic data and slightly rising inflation numbers in several member countries. However, bond spreads are once again reaching uncomfortable territory in Italy, a fact that the European Central Bank won’t be able to ignore once it withdraws from its current role of “government bond buyer of last resort”. The Swiss Central Bank on the other hand has reasons of their own to feel less than pleased about the latest developments in financial markets. The fallout from the Turkish currency crisis has weakened the euro against the Swiss franc to a level not seen since July 2017. Over the past year, the Swiss franc had gradually become less overvalued according to the central bank’s definition. This progress has now been reversed.
3. Emerging markets have taken the brunt of Turkey’s problems, but the recent re-pricing offers some opportunities, too.
Asian and Latin American emerging market economies have little in common with and very limited trade links to Turkey. However, they have suffered from a shift in sentiment, more precisely from the diminished risk appetite of investors globally since the Turkish lira has taken a tumble. We do not see an acute risk of contagion ahead, as we explain on page 7. Indeed, on August 16, reversing several days of decline, global markets have staged a modest recovery, encouraged by hints of a thaw in the stand off between China and the United States with regards to the trade dispute.
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