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2018/04/05 / Erste Group Research

Global Strategy Q2 2018

The global economic environment remains strong and the Fed forges ahead with its rate hike cycle. The ECB by contrast is likely to remove its highly expansionary monetary accommodation only very slowly. Investments such as sovereign bonds or IG corporate bonds tend not to be popular in such an environment, but yields should nevertheless only rise slowly. Consistently strong economic data are lending support to stocks and IG hybrid as well as HY corporate bonds.

Economy: The global economic environment remains favorable despite uncertainty in financial markets. The euro zone economy exhibits continued strong momentum, with expected GDP growth of +2.4% in 2018. However, it remains unclear to what extent economic growth will be reflected by a recovery in inflation (2018e: 1.4%). While growth in the US is expected to weaken in Q1, a number of indicators continue to suggest that the underlying trend in the US economy remains strong. Employment is rising significantly and the US administration has passed a massive increase in public spending. The volume of trade that would be affected by the recently discussed imposition of trade barriers by the US is too small to exert noticeable negative effects. However, there is a risk that the situation escalates and more tariffs are implemented globally. We maintain our forecast for US GDP growth of +2.8% in 2018. The environment harbors upside risks for our current inflation forecast of 2.2%.

Bonds: The ECB's monetary policy will remain unchanged until September 2018. This summer the ECB Council will make a decision about its policy after this point in time. Most important will be the central bank's new guidance, i.e., the statements with which the ECB will guide expectations regarding the future path of interest rates and the reinvestment of proceeds from maturing bonds. Expectations about its future monetary policy bias will continue to be a decisive driver for European government bond markets. We expect only a slow increase in bond yields. The period of transition after years of highly expansionary monetary policy and the uncertainty triggered by protectionist measures taken by the US could lead to greater market volatility this year. In principle we expect US treasury yields to rise very slowly as well. Two more rate hikes are expected this year, but in view of the upside risks for the economy and inflation, a third rate hike cannot be ruled out.

Currencies: Interest rates in the US continue to rise, while the ECB will only slowly exit its highly expansionary monetary policy. This favors a strengthening US dollar. Despite the uncertainty in financial markets, no safe haven flows were discernible in foreign exchange markets. We expect a further gradual weakening of the Swiss franc and a sideways move in gold.

Stocks: Based on estimates calling for strong revenue and earnings growth rates, we expect global stock markets to post moderate gains (0% to +5%) in the 2nd quarter. We favor stocks in US companies as well as emerging market stocks. The period of low volatility that prevailed in recent years appears to have ended.

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General information

AuthorErste Group Research
Product nameGlobal Strategy
Topic in focusCredits/ Corporate bonds, FX, Macro/ Fixed income
Economy in focusAustria, Croatia, Czech Republic, Eurozone, Germany, Hungary, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Switzerland, Turkey, United States
Currency in focusCroatian Kuna, Czech Koruna, Euro, Hungarian Forint, Polish Zloty, Romanian Leu, Serbian dinar, Swiss Franc, Turkish Lira, US Dollar
Sector in focus-


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