In the last month the global macro backdrop has improved. The manufacturing sector seems to have bottomed-out and data from China are stronger. Elsewhere, we expect eurozone growth to maintain its recent trend, US growth to pick-up after another weak first quarter, but EM growth to stay weak.
Dovish shifts by central banks earlier this year have supported economic growth and markets. This month, we do not expect any significant news from the ECB and Fed. We do not think the BoJ will ease again either, but this is where the biggest upside risk is. Beyond April, however, the path for the Fed, and how the difference between market pricing and Fed guidance is reconciled, are the main uncertainties.
This backdrop leaves markets in a delicate balance. The risk rally can extend further if economic data remain strong enough to ease growth concerns, but weak enough to keep the Fed on hold. But sentiment could reverse if the Fed is seen as closer to raising rates, or if, at the other extreme, growth stutters, oil sells-off, political risk escalates in Europe or China concerns re-emerge.
Therefore we remain cautiously positive on equities, neutral core rates, and still believe in the strong dollar theme – although a reversal of recent weakness hinges on the market pricing more Fed rate rises. We expect corporate credit to remain supported by the upcoming ECB purchases, especially in Europe. Finally, a Fed on hold should allow EM assets to perform, but the focus remains on idiosyncratic stories.
David Folkerts-Landau, Group Chief Economist Key pages this month:
p 6: macro backdrop has improved but global growth remains sluggishp 9: in near-term, geopolitical risk dominates European outlookp12: how to read recent mixed messages from Fedp14: outlook for BoJp18: drivers of recent market movesp20: bull-bear cases for equities [more]