The main concerns that have been clouding the global economic outlook of late such as the trade dispute, Brexit and third-quarter economic weakness are proving to be a contumacious lot. Investors beware, they won’t go easily.
1. U.S. investors benefit from a still robust economy, but wonder how many further rate hikes the economy can digest.
The United States is still the “locomotive” of global economic growth in this second half of the year, but it is not immune from geopolitical worries and economic concerns. Much is expected from the imminent meeting between U.S. President Trump and his Chinese counterpart Xi Jingping, as it may pave the way for an eventual agreement in the trade tariff dispute that has done much to unsettle investors’ nerves in recent months. On the domestic front, the President has to avoid a government shutdown on December 7th, which means negotiating with the newly Democrat-controlled House of Representatives on the funding for the wall on the Mexican border, relations with Saudi Arabia and the investigation into Russian interference of his election in 2016. Lastly, investors are beginning to fear that the Fed may be getting ahead of itself with interest rate hikes. Even though a rate hike for December is still widely expected, Fed Chairman Powell has recently uttered some vaguely dovish words to the effect of the Fed funds rate “nearing a neutral level”.
2. Third-quarter weakness has not spared European countries outside of the Eurozone, while Brexit remains unresolved.
Meanwhile, in Europe two countries outside of the Eurozone have mirrored the Eurozone’s recent economic weakness, Switzerland and Sweden. Both suffered an unexpected contraction in GDP growth in the third quarter. This reminds us that the normalization of monetary policy is going to be far from universal, and even further from concomitant. Investors attention is however still focused on the ongoing Brexit drama that in recent days has become more uncertain still. All options, including a no-deal “hard” Brexit are still on the cards, as we explain on page 3.
3. After years of asset purchases by the Bank of Japan, its balance sheet has surpassed the country’s GDP, but inflation remains weak.
Finally, Japan has suffered a disappointing GDP result in Q3 as well, in this case due to one-off factors related to earthquake and weather conditions. But economic activity was also pulled down by slower growth in the information technology sector and there are continuing concerns that escalating U.S./China trade tensions could increasingly impact the economy more generally. Indeed, the latest Manufacturing PMI reveals a fall from 52.9 in October to 51.8 in November, the lowest since November 2016. Some manufacturing sectors will be impacted if geopolitical concerns strengthen “safe haven” demand for the JPY. The balance sheet of the Bank of Japan, meanwhile, after years of asset purchase activities to stimulate the economy is worth more than the Japanese GDP.
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