Global Strategy Q3 2018
The economic expansion remains robust but is currently beset by an increase in uncertainty. While the Fed continues to implement gradual rate hikes, the ECB is likely to leave interest rates unchanged through the summer of 2019. Yields on German Bunds should only rise slowly, safe haven investments are not overly popular in an environment like the current one. Continued strong fundamental data are lending support to stock markets, as well as IG hybrid and HY corporate bonds.
Economy: The outlook for an acceleration of US economic growth this year is good. Massive fiscal stimulus has left its tracks, particularly consumer spending exhibited strong growth momentum in Q2. So far the trade dispute has not done any noticeable damage to the performance of the US economy. The volume of trade that is affected remains hitherto small and it is too early to quantify the indirect impact of the increase in uncertainty triggered by the trade dispute. The inflation rate should moderately increase in coming months, but risks remain skewed to the upside. Growth momentum in the euro zone has weakened somewhat and we expect GDP growth for the year as a whole to marginally decrease compared to the previous year. Recent weakness in the euro should lend support to exports, but the trade dispute could eventually weigh on foreign trade. Domestic demand and investment spending should at the same time remain strong in H2. Headline inflation in the euro zone is expected to slightly increase to an average of 1.6% this year.
Bonds: The ECB has committed itself to a monetary policy course until well into 2019. Net purchases of securities by the central bank are to be finally discontinued at the end of the year, while reinvestment of proceeds from maturing bonds in its portfolio will be continued for a long time thereafter. The future course of interest rates was the most important aspect of the ECB's guidance. Interest rates are to remain at current levels until after the summer of 2019. In view of this, as well as due to political tensions, bond yields should only rise slowly. By contrast, the Fed continues to regard further gradual rate hikes as necessary. Thus we expect two more rate hikes in the US until the end of the year (in September and December). US trade policies have triggered uncertainty in financial markets. Hence the yield on the 10-year treasury note currently trades close to 2.9%. We expect yields to moderately increase until the end of the year.
Currencies: A lack of speculation on imminent rate hikes in the euro zone should continue to put pressure on the euro against the US dollar. In response to a continuing global economic expansion, we believe the Swiss franc will gradually weaken against the euro, provided political tensions do not escalate. We expect gold to move sideways.
Stocks: In view of greater uncertainty, stock market indexes of developed countries should continue to outperform those of emerging markets. US equities in turn should exhibit relative strength compared to European stock markets. All in all we expect global stock indexes to advance amid elevated volatility and post gains in a range from 0% to +5%.