Turning to fiscal policy?
By
👤Schroders
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Economic and Strategy Viewpoint
Markets hit an air pocket in October with risk assets selling off on a range of fears from US-China trade wars to Brexit to the Italian budget proposal. At the time of writing the S&P500 index has given up its gains for the year whilst the Eurostoxx 50 is down by 10% and emerging market equities by 14% year to date. Bond markets have not had a particularly good year, but relative to equities the gap in performance means that the Credit Suisse risk appetite index is close to panic (see chart on front page). Trying to pin down the cause of the correction is absorbing much media attention but we would point out that concerns over trade wars and who is or isn't leaving the EU or the euro have been around for some time. For us the most plausible trigger of the recent volatility is the rather downbeat comments from US companies about next year. Caterpillar, often seen as a global bellwether, expressed caution on the outlook citing tariffs, while another industrial firm, 3M, cut its full year earnings forecasts, blaming the strong dollar. When combined with comments and somewhat disappointing quarterly results from Amazon and Alphabet – Google's parent company – there is a sense that we have passed the peak in terms of earnings growth. In addition we would remind readers that an expected increase in volatility has been one of our themes for this year, a consequence of the tightening of monetary policy and the challenge for markets of beating elevated expectations. After the positive growth surprises of 2017, investors raised their forecasts and we have seen more downside surprises this year. On the liquidity side, the US Federal Reserve (Fed) has indicated that policy rates are now at neutral, but is showing little sign that the rate hiking cycle is over. Meanwhile, quantitative tightening continues apace with the Fed stepping up its balance sheet reduction programme to $50 billion per month in October. The European Central Bank (ECB) has started to taper and confirmed that it will end its asset purchase programme in December. Meanwhile, there are increasing signs of the Bank of Japan (BoJ) scaling back purchases of government bonds. Clearly, tightening liquidity is set to remain a feature going forward and our focus this month is on the growth outlook and whether we might see a repeat of the conditions that led to the synchronised recovery of 2017. Stronger growth would allay earnings concerns for next year and if broadly supported could prompt a market rotation away from the US dollar, towards non-US equity markets
By
👤Schroders
