210 (21-30)
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Politics remain a key focus for markets, but the latest developments in Europe are positive. In France, the first round of the presidential election ruled out the least market-friendly ‎outcome, and although eurosceptic Marine Le Pen is in the run-off as expected, polls suggest reformist Macron should win. The snap election called in Britain for June is a material positive game-changer for Brexit negotiations. Beyond politics, focus has been on fading conviction in so-called Trump trades – higher inflation expectations and interest rates and buoyant risk assets – following speed bumps on the US domestic agenda and increased geopolitical tension. But with global macro momentum solid – though off recent highs – and global growth expected to pick-up next year and approach 4% in 2018, do not dismiss inflation risks, especially in the US. Indeed the macro backdrop comforts the view that we are past peak central bank easing. The Fed will likely raise rates twice more this year and announce the start of the unwind of its balance sheet. The ECB is on track to announce a taper of its quantitative easing programme later this year, but the tone at the April meeting should still be quite cautious. We have revisited our currency views. The snap UK election caused us to increase our sterling forecast but did not alter our medium-term bearish stance. We still expect the euro to break parity but the sequencing of the ECB's tightening policies is key: a shift toward rate rises rather than a withdrawal of quantitative easing would be bullish for the euro. In rates, we expect bond yields to climb beyond near-term election risk. In credit we expect the low default environment to persist. We see valid counters to the consensus view that European equities should outperform US equities. David Folkerts-Landau, Group Chief Economist Key pages this month: P6 French election updateP7 UK snap electionP10 Fading Trump tradesP11 Don’t dismiss inflationP19 Updated views on sterling and euro [more]
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Potential shifts to the policy landscape remain in focus for markets, where uncertainty still reigns on most fronts. Polls for the French Presidential Election have tightened. A Le Pen victory remains unlikely but cannot be ruled out. Politics will continue to be at the fore elsewhere in Europe, with the Dutch election, the UK triggering Art. 50, turmoil in Italy and ongoing negotiations with Greece. Prospects for the key pillars of Trump's economic agenda also remain uncertain. Markets have better clarity on other fronts: a chorus of more hawkish Fed rhetoric jolted expectations for a March hike. Counterbalancing this uncertainty is a broad-based uptick in global growth momentum, which has supported market sentiment. In the US, surveys point to robust growth, and consumer and business sentiment are showing signs of animal spirits, though hard data have been somewhat weaker. Europe has been an upside surprise, with supportive data tilting the balance of risks in a more positive direction. The growth story is also cautiously more positive in China and EM more broadly. Improved growth and inflation prospects are allowing developed market central banks to sketch their exits from extreme accommodation at varying speeds. The Fed should raise rates three times this year. The ECB, meanwhile, is slowly shifting toward a less dovish stance, with an announcement of a tapering of QE towards zero likely by yearend. No further easing is expected from the Bank of Japan and the Bank of England. The push and pull between solid growth momentum and political risks looks set to continue in the near-term. On net, this should support risk assets, especially in the US, though there are some cautionary signals in Europe. Developed market bond yields should continue to climb higher, and the dollar is set to strengthen further. David Folkerts-Landau, Group Chief Economist Key pages this month: P7 What to watch for at the March Fed meeting P8 Trump’s policy agenda P9-10 French election updat [more]
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More than two weeks removed from President Trump’s Inauguration, politics and policy remain key market drivers. We continue to believe that Trump’s victory marked a positive regime change in the US. Tax cuts and deregulation are expected to jolt the economy toward a better long-term equilibrium of higher growth, inflation and interest rates. But this regime change also brings a greater degree of policy uncertainty. Politics remain the key risk in Europe, especially in the first half of the year, where we are more concerned about risks in Italy than France. While we do not expect a material negative macro impact this year, these developments bear close watching. Markets have started to price some of this risk. Despite these political uncertainties, global momentum has strengthened and is currently running at its best pace in more than a year. Our global macro outlook remains largely unchanged, though: global growth should pick up only gradually this year, as the spillover from better US growth prospects is limited before 2018. The focus in markets has been on the underperformance of Trump trades – US equities stalling, the dollar softening, and rates declining. Positioning and the perceived lack of policy progress are behind this underperformance. Incoming newsflow on Trump policies will be an important driver from here, but cleaner positioning should allow for a resumption in Trump trades. Central banks have stepped back from the spotlight for the time being. But attention should return to monetary policy later this year, as the Fed considers changing its reinvestment policy and balance sheet easing could slow in the eurozone and Japan. David Folkerts-Landau, Group Chief Economist Key pages this month: P7 Strong global macro momentumP9 Trump: recent developmentsP10-11 Border tax adjustmentP12 European political risk P14 Positioning and Trump trades Recent publications:The House View: Outlook 2017 (09 January 2017) You can access a two-page update of Deutsche Bank Research's views on global macro, monetary policy and markets, as well as some of the key themes driving them, at any time by downloading The House View Snapshot from: houseview.research.db.com. [more]